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Technology: What technology companies can learn from the Pareto Principle

The so-called “80/20 Rule” can help companies manage technology development and implementation

Many of you may already be familiar with the “80/20 Rule,” formally known as the Pareto Principle. Officially, the Pareto Principle states that approximately 80 percent of the outcomes result from 20 percent of the inputs. For example, 80 percent of a company’s sales come from 20 percent of its sales force. Many have found that the application of the Pareto Principle can be used to effectively audit, assess or implement processes and procedures to profitably manage the technology-oriented enterprise.

Consider the breadth of subjects to which the 80/20 Rule might be applied in a business centered upon the development, sale, or implementation of technology:

  • Do 80 percent of your innovations come from 20 percent of your engineers?
  • Do 80 percent of your patents stem from 20 percent of your innovations?
  • Are 80 percent of your products or services covered by 20 percent of your patents?
  • Is 80 percent of your revenue produced by 20 percent of your patented products or services?
  • Is 80 percent of your licensing revenue produced by 20 percent of your patents?

Ultimately, this process leads to an in-depth focus on the value the technology-oriented enterprise generates from its innovative resources. In other words, if 80 percent of your inventions are coming from 20 percent of your engineers, then a number of cause/effect scenarios are possible (e.g., has the company hired the right type of engineers; are the engineers properly incentivized to innovate; is the company’s process for capturing ideas on paper adequate?).

As another example, if 80 percent of your products are actually covered by 20 percent of your patent portfolio, or if 80 percent of your revenue is being generated by only 20 percent of your patented products or services, then perhaps the company is spending valuable resources to protect technologies and innovations it does not need, or there is hidden unlocked value in the company’s patent portfolio. Alternatively, if the company finds itself in a position where its portfolio is not necessarily mapped to its current product or service offering, several other options surface, such as the implementation of maintenance fee audits or the initiation of enforcement or licensing campaigns.

As you can see, the “simple” application of the 80/20 Rule in this fashion encourages the technology-oriented enterprise to focus on the entire supply chain of innovation, from research and development to cash flow. Proper application and consideration of the 80/20 Rule allows for the enterprise to:

  • Maximize development of new technologies and encourage the proper application of innovation
  • Improve innovation and technology management processes
  • Diagnose gaps in the overall intellectual property process for further optimization
  • Ensure revenue is tied to resources in which the company has invested
  • Properly channel future investment in technologies from which the company has generated, or could generate, value

Alternatively, companies can also use the 80/20 Rule in competitive analysis in order to gauge the innovative productivity of their competitors. For example, a company might map a given competitor’s products back to the competitor’s known patent portfolio in an effort to determine whether the competitor’s products are protected. In other words, you might find that although your competitor has several product or service offerings, it only has one or two patents in its portfolio that cover said offerings. Knowing that, the company can either target the key patents for licensing or invalidity challenges, or could seek to acquire patents from the competitor that the competitor is not using.

The Pareto Principle is a valuable analytical tool for any technology-oriented enterprise that can be used to great effect in managing technology development and implementation. Considering the ramifications of the Pareto Principle in advance can provide the enterprise with a valuable competitive advantage.

Contributing Author

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Gregory Novak

Gregory V. Novak is the Chief Executive Officer and Managing Partner of Novak Druce Connolly Bove + Quigg. Mr. Novak serves as national intellectual...

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Contributing Author

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Matt Todd

Matt Todd serves as the Administrative Partner at Novak Druce Connolly Bove + Quigg and is the Co-Chair of the firm’s New Ventures &...

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