Well yes, using rel=nofollows on your internal link structure is an advanced SEO technique but it can help to improve your SEO. [See update at end of page, it's likely this technique no longer works].
I asked this question on LinkedIn a couple of weeks ago and what follows is a summary of some of the responses I received and other research I’ve done online.
What is it?
“A site may have many pages that have the opportunity to get crawled and indexed in the SERPs (search engine results pages). You're also looking at near infinite choices for how you interlink all those pages. Out of all those permutations, there is one configuration that is the most optimal from an SEO perspective.
That's because it maximizes the flow of link juice (e.g., PageRank if you're speaking purely in Google terms) to your most important pages and minimizes (or cuts off completely) the flow of link juice to your least important pages.” - Stephan Spencer at Search Engine Land
By adding rel=nofollow to a link you are telling a spider not to follow that link. This was invented to be used in comment fields to prevent comment spam. However as all it does is prevent link juice being passed on, SEO specialists have realised it can be used (completely legally, Google even approves it!) to sculpt internal linking structures.
Example: If you have 100 internal links on a page you are diluting that page’s link juice. By adding rel=nofollow to 90 of the less important links the 10 that remain have 10 times more link juice and subsequently benefit the pages they link to more.
Before I get onto the use of rel=nofollow it’s worth considering that this technique is used to fine tune internal linking structure. There’s no point in fine tuning your internal linking structure if it’s sculpted incorrectly in the first place.
“The size and shape of your site's navigational hierarchy is your blunt instrument and rel=nofollow is your scalpel.” - Stephan Spencer at Search Engine Land
“One of the most powerful, and most underdeveloped, on-page SEO tactics is rejigging your internal hierarchical linking structure to optimise the flow of link juice.” This makes sense from an SEO point of view but also from a user point of view – if all your information is arranged in a logical structure it will make for a better user experience.
So if your site structure is as perfect as you want it, you’ve tried card sorting, user testing and the hippo (Highest Paid Person’s Opinion) is happy then it might be time to look at using rel=nofollow.
First check you have a good xml and HTML sitemap on your site. As Tom Griffin stated in the LinkedIn answer, “The goal is not to block the page from being indexed - the goal is to funnel internal authority throughout your site in the smartest way possible”.
Then you need to select which pages on your site you identify as the most important (and least important) for the relevant keywords you target. This in itself is a worthwhile task for any webmaster. There could be many pages on your site which rank highly for certain keywords but are underused due to being buried in your site structure. The links from those pages could be a massive boost to other pages on your site.
Next is the big one - look at the pages themselves and identify all the links. Clearly this could be a mammoth task even for a site of a few 100 pages so start with the biggie – the home page.
I haven’t tried this yet but I’d recommend creating or using some sort of database or record of which links are on or off (rel=nofollow) to best understand the impact you are having on your site structure. As mentioned above you don’t want to risk creating a dead end and cutting off a page.
Real life examples
SEOmoz have implemented rel=nofollow on their site and witnessed a 20% rise in traffic. However others are more sceptical; Matt Cutts from Google says that nofollowing your internals is a 2nd order effect. It will best optimise the traffic you have rather than gain you more. Essentially he believes there are others things you can do first for a better return on investment.
And my final question on LinkedIn was why aren’t the big sites doing it?
Bbc.co.uk, theregister.co.uk, look in their source code and you won’t find one rel=nofollow tag. The only answer I can think of (and the only answer I got on LinkedIn from Brian Rogers) is that if you have a perfect link structure and your pages rank very highly due to large amounts of external links what difference will fine tuning your internal links make? Or maybe it’s just too complicated?
So to summarise, it’s worth it and it works. How worth it is something only you can decide and, to bore you with clichés, this is only one tool in the SEO armoury.