Sustainable profitability, unlocked. Understand how time and effort is being spent in your organization by measuring and managing capacity utilization.
Did you know the average worker is productive for less than three hours daily? Considering that the typical American work week totals 40 hours, a ton of productivity is being lost.
Any good business understands that while employees need downtime, their productivity is tied to business success. To better understand your organization's potential output (and your workforce's potential for productive work), you need to track capacity utilization.
In this article, we're discussing this handy metric, how to measure it, and some ideas about improving it.
By definition, a capacity utilization rate measures the time the organization's employees spend on productive work. Also known as resource utilization, this information can inform capacity planning, which aims to plan a business’s resources around predicted demand strategically.
An individual’s capacity utilization rate is measured as a percentage and refers to the time they can realistically be productive in a day.
After all, people can’t be productive 100% of the time — nor should they be expected to be — and capacity utilization rate seeks to measure how much of that potential productive time is being utilized.
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Let’s dive into why measuring your capacity utilization rate is so important.
Corporate capacity utilization rates help identify if you have the capacity to take on new projects. If your utilization rate is high, you're making good use of your capacity, whereas low capacity utilization suggests room to take on new projects.
When you understand your business capacity - or your workforce’s potential for productivity - you can put measures in place to ensure you reach these goals. By improving workflows, identifying inefficiencies, and reducing waste, you can optimize resource utilization and increase revenue potential.
Capacity utilization rate is a helpful metric for informing effective resource allocation, as it helps you measure your business’s capacity for output against predicted demand. The process of matching your resources to upcoming business is known as capacity management.
While low capacity utilization rates suggest room to take on more work, a too-high capacity utilization rate indicates that your business's output is larger than its capacity. This might mean it's time to consider upskilling your teams and making new hires.
When you understand your organization's capacity utilization rate, you can make decisions that ensure they’re not overstretched or understimulated.
Long story short, future-focused businesses understand that capacity utilization rate is an indicator of not only its capacity for output but also the health of the organization and the well-being of its employees.
Capacity utilization rates aren’t an exact science, but they’re invaluable in helping resource managers understand whether they’re getting maximum value from their human resources.
The optimal utilization rate is hard to pinpoint because it will differ by industry, type of work, seasonality, and individual. After all, what one person can accomplish in three hours may vary greatly from that of their deskmate.
But if we had to put a number on it, research suggests that the optimal capacity utilization rate falls around 80%. This meets the need for high productivity while allowing room for downtime, admin, and fluctuations in demand.
But did you know that underutilizing or overutilizing people can negatively affect them and their employers?
Further reading: The Problem with 100% Capacity Utilization
So, what happens to businesses that fail to utilize their resources effectively, leading to too high or too low capacity utilization? Let’s take a look.
The effects of underutilization, which may point towards low capacity utilization, include:
As for the dangers of overutilization, they are many of them:
Now you understand the concept of capacity utilization and why this metric is so important, how do you actually measure your capacity utilization rate? Let’s break it down into several easy-to-follow steps.
The first step in measuring this metric is defining the data to be collected. This is the formula for calculating capacity utilization: Capacity utilization = (actual productive hours/ total available capacity) x 100
But to complete this equation, you’ll need these two data points to hand:
These data points represent the values you want to use in your report.
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First, set utilization goals across the organization. Your organization’s utilization goal represents the maximum hours available to be used productively.
These may differ from department to department or by role, but you should have an average across your organization.
As we covered earlier, this should be around 80% of the working day, allowing for good productivity while considering that people need unscheduled time.
So, if your company’s work day is 8 hours long and you have a utilization goal of 80%, its total available capacity utilization can be worked out like this:
(8/100) x 80 = 6.4
That means your total available capacity per day is 6.4 hours. Remember, you can scale this up by week or year to look at the company’s capacity utilization at a larger scale.
Now, it’s time to define how you’ll measure your workforce’s productivity. What’s important to note is that you measure capacity utilization in two ways:
We’re going to focus on the latter method for now. The easiest way to do this is by digitally tracking upcoming utilization — more on that in a moment — but you can’t do this if you don’t understand the difference between productive and non-productive work. Here's how professional service firms and agencies typically differentiate between the two.
Productive time refers to time spent on client billable tasks that directly generate revenue, such as:
Non-productive time typically refers to any tasks that don’t generate revenue, such as:
Remember, when measuring capacity utilization, you'll usually exclude admin and operational staff whose productivity isn’t directly related to driving revenue through billable hours.
Your utilization data doesn’t appear in a spreadsheet by itself, so you’ll need to put systems in place to collect it.
If you want to understand how much of your organization’s time is forecasted for productive work moving forward, you need a robust resource management platform — like Runn — to plan upcoming projects that will contribute to your business’s productivity.
The combined power of project planning and resource scheduling will allow you to plan your resources months in advance, giving managers an overview of projects in the pipeline and which teams and individuals are assigned to them.
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Now comes the good part: calculating your capacity utilization!
A capacity report uncovers your ability to take on new work by comparing your capacity to your confirmed and tentative workload. This is valuable for long-term capacity planning as it can reveal over or underutilized resources and answer questions about bandwidth to take on new projects, forecasted demand, and hiring needs.
And good news — with Runn, you can automate capacity utilization reporting. Here’s how.
Curious about exactly how these capacity and utilization reports can be used? They can show you:
You’ll need to run these reports regularly to understand if you have a high or low capacity utilization rate, allowing you to uncover your capacity to take on new projects or where you’re at risk of overutilizing your staff and tanking productivity.
Have you identified that your capacity utilization is too low or too high? Here are some helpful best practices to help you fix it!
If you’ve noticed your business’s revenue slowing or employee engagement is uncomfortably low, you have identified a problem with capacity utilization!
But what are you meant to do about it if you don’t understand where the problem lies? After all, you can’t manage what you can’t measure.
The first step to improving capacity utilization is to measure it accurately. One way you can do this is by…
If your goal is achieving optimal capacity utilization, you need to understand where your problems lie. This means reviewing your historical utilization data.
The simplest way to track how employees use their time is with electronic timesheets directly connected to your resource plans. This data can then be pulled into reports, including capacity utilization reports, allowing you to understand:
Thankfully, tools like Runn make reporting on and understanding capacity utilization rates easy. Some benefits clever resource managing platforms offer include:
Book a demo with Runn today, or give our features a try for free ➡️
