Pareto Principle or Pareto Law is a useful tool to help you prioritize and manage the work in your business, among other applications and disciplines. The pareto principle has become a popular business maxim that is based on the prediction that 80% of effects come from 20% of causes. It has been used to describe everything from economics to projects. Also, this law is of a great support when identifying the services or goods to be considered in the operationalization of the “Bundle Services Discount Strategy”, a marketing tactic that involves offering two or more goods or services as a package deal (consolidation of requirements) for a discounted price, which is negotiated and mutually agreed between Buyer(s) and Seller(s).
In 1906, Italian economist Vilfredo Pareto, an Italian engineer, sociologist, economist, political scientist, and philosopher who made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices, created a mathematical formula to describe the unequal distribution of wealth in his country. Pareto observed that 20% of the people owned 80% of the nation's wealth. In the following years, this rule was applied with uncanny accuracy to many situations and be useful in many disciplines, including the study of business productivity. Other examples related with the application of this tool are mentioned as follows[1]:
- Project Management: 20% of the work consumes 80% of the time and resources. 80% of value is achieved with the first 20% of effort.
- Program Management: 80% of problems originate with 20% of projects.
- Management: 80% of work is completed by 20% of your team.
- Technology: 80% of customers only use 20% of software features.
- Sales & Marketing: 80% of sales come from 20% of your clients. 80% of sales come from 20% of your products. 80% of sales come from 20% of your salespeople. 80% of your complaints come from 20% of your customers.
- Wealth Management: 80% of wealth is owned by 20% of people.
As a result of my professional experience working with a major Oil Operator in the Gulf of Mexico (“GoM”), I have had the opportunity to apply this Pareto Principle with the purpose to contribute on adding value to business operations by implementing of the effective negotiation strategy named “Bundle Service Discounts” with major drilling and logistics contractors for drilling, well, logistics and downstream service contracts. Utilizing this tool, I was able to identify thirty-two (32) major contractors, related with approximately 20% of the total agreements signed between Oil Operator and Contractors in the GoM with an associated contracts value representing 80% of the total contract amount executed between the parties.
Figure # 1 – 80% Contracts Value
Based on the above evaluations, negotiation rounds were conducted with the 32 identified major contractors, resulting in approximately US$20.9 million cost savings on contract price discounts. This achievement was recognized by the Oil Operator given that this Key Performance Indicator (KPI) achieved a 33% margin above the contract original discount target established by the Company, for Cost Optimization initiatives.
These effective negotiation strategies were also applied as a proactive and preventive initiative which resulted in the execution of Master Services Agreements (MSAs) with major U.S Contractors operating in the GoM for attending to Emergency Scenarios that could arise as a result of oil spill events and in accordance with Oil Spill Response Plan (OSRP) approved by the U.S. Bureau of Safety and Environmental Enforcement (BSEE), as per the Code of Federal Regulations, Title 30 – Mineral Resources – Part 254 “Oil Spill Response Requirements For Facilities Located Seaward of the Coast Line” (30 CFR Part 254). This challenging MSA project took into consideration the provision of 28 category of services associated to emergency situations (i.e. Emergency Medical Services - SAR/MEDEVAC, Helicopter transportation services for search and rescue, Support vessels, Firefighting boats, Drilling Contractors, Marine Contractors, Oil Spill Equipment, Airplanes, Dispersant application, Land Transportation, Waste Disposal, etc.) and the implementation of the lessons learned from the “Macondo” well accident (blowout) occurred in April 2010 on the Macondo prospect in the GoM.
One of the most relevant executed agreements (as per BSEE requirement), was the MSA signed between Oil Operator and a Consortium of Deepwater operators and non-operators committed to building the safest, and fastest Deepwater containment response system, including to access to well capping & containment equipment and services in the event of an uncontrolled flow of hydrocarbons in the GoM. As a result of this negotiated agreement, Oil Operator obtained (i) cost saving of approximately 50% when compared with the average marketplace rates, (ii) reductions in the operational costs per well and (iii) accessing to capping, containment and technical support from peer companies in the GoM.
[1] https://management.simplicable.com/management/new/examples-of-the-pareto-principle
