Recent changes in the processing of the nofollow attribute have caused consternation and concern among many publishers. Let's talk about what has happened, and how you should adapt your SEO strategy accordingly.
A Little History
PageRank sculpting has been a hot topic since 2007. This was the idea that you could control, at a granular level, the flow of link juice in your Web site through the use of the nofollow attribute. The concept can be illustrated by this chart:
In our example, Link 1 has the nofollow attribute on the link, and Link 2 and Link 3 don't. Google's stated position in 2007 (you can see it detailed here and here) was that this would result in Link 1 not passing (or consuming) any PageRank, and that PageRank getting redistributed through the other links in the page.
This is represented in our diagram by the percentage figures shown after the arrow. Link 1 passes no link juice, and links 2 and 3 pass half the passable link juice of the page each.
This touched off an era where many SEOs recommended PageRank sculpting, and lots of sites did it. Data pulled from Linkscape in March 2009 indicated that 3 percent of the links on the Web were nofollowed.
How This All Changed
At SMX Advanced 2009, Matt Cutts made statements about how this had been changed, and which he then clarified in his June 15 "PageRank Sculpting" post. Basically, Google's position appears to be that this is the impact of using nofollow on selected links:
In this revised world, Link 1 still doesn't pass link juice, but the link juice it chooses not to pass is simply discarded. The juice passed through Links 2 and 3 isn't affected by whether you nofollow Link 1.
Impact of the Change
Based on this, it may make sense to remove any onsite nofollows you have. For example, if you nofollow all the links to your "About Us" page, the link juice in those links is discarded. If you let the links pass juice, your About Us page will be able to pass some of that juice back into the site through the links contained on it.
If you want to be cautious about this, carefully check out the results of removing the nofollows. Monitoring the impact of every SEO change you make is always a good idea.
While I believe that Google is serious about their new stance, theory (or position) and practice don't always align in the world of search. Also, while Google announced a new policy, Yahoo and Microsoft haven't commented on this.
This is pretty aggressive stuff though. It's a bit like hanging a flag on your site and saying "I am aggressively optimizing for search engines." It might fit well for smaller sites that believe their overall visibility is low (I still wouldn't recommend it for those sites), but sites that have a fair amount of public visibility should stay away from it.
Instead, use the natural link structure of your site to flow link juice (and your site visitors) where you want them to go. Creating the best possible user experience on your site is the best way for you to spend your time, as it will also make your site more attractive to potential linkers.