Capacity Planning: Everything You Need to Know
Capacity planning can be challenging for organizations of any size. It requires a delicate balance between real-time employee availability, available dollars in the budget, and the demand for work from customers, partners, or other stakeholders.
We’ve created this handy guide to help you better understand how to manage employee capacity, allocate employee resources, and most importantly, maximize profitability.
What Is Capacity Planning?
Capacity Planning is the process in which organizations or teams match available employee hours against the needs of a project or program.
More specifically, “capacity” is the maximum amount of work that can be completed in a given period. (This is often measured in hours available to be worked by employees.) And in this context, “planning” is the act of scheduling employee hours against a fixed or expected amount of work.
For example: If your company has 10 employees who each work 40 hours per week, then the company has 400 hours of weekly capacity. Without factoring in overtime, this company could handle a maximum of 400 hours of business each week.
Measuring Employee Capacity
Let’s stick with the 400 hours example. If your business has 400 hours of available employee time but only 200 hours to perform, then your team is at 50% capacity. Conversely, if there are 800 hours of work to perform, then your team is at 200% capacity. Generally speaking, neither of these scenarios is ideal. Low-capacity teams have idle time on their hands, which is particularly troubling for agencies, consultants, or anyone who bills for their time (granted, not all non-billable hours are created equal). Teams that are over capacity must contend with long and difficult hours, while management is often forced to hire expensive contractors, pay employee overtime, or deliver lower quality work to the client.
Strategic Capacity Planning
There are three principle methods to approach capacity planning. Each method is based on reacting to or planning for market fluctuations and changing levels of demand.
These capacity planning strategies are Match, Lag, and Lead.
Match
Matching is a strategy that involves monitoring the market for demand increases and decreases on a regular basis. Capacity is then changed to match demand.
Matching capacity is considered to be a moderate strategy that requires near-constant, incremental adjustments. It can require a considerable amount of work, but it is a low-risk strategy that is ideal for many organizations.
Lag
As its name suggest, the lag strategy involves waiting until there is true demand before adding additional capacity. This is the most conservative strategy, as hiring is only initiated when demand is at 100%. This method virtually ensures the lowest possible staffing costs but can lead to the loss of potential customers, if there is not enough talent on hand to deliver products or services.
Lead
Lead capacity planning is the most radical of the capacity planning strategies, as it involves changing capacity in anticipation of market demand. Hiring can be a slow process, and lead capacity planning allows organizations to be prepared for growing or rapidly evolving markets. When demand increases, businesses that successfully deploy lead capacity planning will be ready to meet client needs. Granted, incorrect or off base assumptions by management can result in overstaffed teams and have a significant negative impact on the bottom line.
Capacity Planning Template
How much available employee capacity does your organization have? How do sick time and vacations affect employee capacity? Our capacity planning template will make it easy for you to measure team capacity, better understand project staffing needs, and stay on budget!
Employee Utilization
Employee capacity is the number of available hours a team member has to work on a given project. Employee utilization is the percentage of worked hours that are billable. For example, if a marketing coordinator works a 40-hour week but spends three hours on administrative projects and two hours performing non-billable “favors” for key clients, then that employee is at an 88.25% utilization rate (33 billable hours / 40 possible hours). Since this employee worked all 40 hours, he is at 100% capacity.
Top-performing businesses excel at optimizing employee utilization, managing employee capacity, and understanding when — and what type of employee — to hire.
Capacity Planning Glossary
Want to brush up on capacity planning terminology? We’ve got you covered! Check out our capacity planning glossary, where we define and explain the language and terminology around planning employee and team capacity.
What is Resource Allocation?
Resource allocation, for all intents and purposes, is the same concept as capacity planning. When viewed in terms of employees, both resource allocation and capacity planning involve the management of employee time and cost across a project or series projects. When done well, resource allocation offers a number of benefits to your organization:
- know whether or not you need to hire new team members to take on additional work
- more effectively assess opportunity costs when taking on new projects or clients
- maximize billable hours
- increase employee engagement and reduce turnover
If you want to learn more about resource allocation, you're in luck! We interviewed a group of agency executives about how they manage employee time, plan hours against client budgets, and deliver successful outcomes to their customers. In the world of professional services, increasing utilization rates and improving capacity management by even a few percent can make a big difference on the bottom line. It just takes the right tools and a laser-like focus on improving operations.