Having trouble understanding the difference between capacity vs. utilization? You're not alone. Let's dive into the definitions and shed some light on it!
Working in resource management sometimes requires you to speak another language.
From ‘earned value’ to ‘skills matrix’, there are countless terms to learn, and sometimes, the line between their definitions is so thin it’s easy to get confused.
Yet, the more we use distinct terms interchangeably, the more our understanding (and our communication) gets clouded.
One example is ‘capacity’ and ‘utilization’; these terms relate to each other very closely but are not interchangeable, despite being often confused.
Today, we’re going to untangle the differences between these two words once and for all.
Capacity is the total output that your business is capable of with its current resources. In resource management, ‘capacity’ typically refers to the maximum number of hours each employee can realistically work in a specific period.
This information is then used to inform project planning, workforce management, and other strategic initiatives.
For example, if an employee is contracted to work a 40-hour week, their capacity for meaningful work may be 32.5 hours, breaking down to around 6.5 hours a day. This assumes ideal conditions, meaning no unplanned downtime or work falling out of the resource calendar.
People are limited by factors such as planned time off, downtime, and distractions that may pull them away from their desks. In short, you can’t expect your people to be grinding away at tasks that yield profit 100% of the time.
On the other hand, utilization rate measures what percentage of an employee’s work time is spent on productive work that benefits the company. This information is useful for helping team leaders understand how individual employees’ or teams’ time is being used, allowing them to make informed resourcing decisions and optimizations.
There are two types of utilization to be aware of, as these each serve different purposes in measuring productivity:
Total utilization is the time people spend working on all work tasks, including billable work (client projects) and non-billable work (internal tasks, training, conferences, etc.), and represents the percentage of time resources spent productively.
Billable utilization only measures time spent on revenue-generating tasks, typically client projects, and represents the percentage of time resources are driving profit.
When calculating capacity utilization, 100% represents the total capacity available to be used, though a 100% utilization rate is not a realistic goal to chase. People are not machines and can’t be expected to work at maximum effort all day, every day.
Resource utilization can be calculated by working out what percentage of a person’s total available hours are used productively.
For example, let’s return to our example of the worker who is contracted to work 40 hours a week, of which 32.5 are available for meaningful work. If they spend 30 hours working on valuable tasks, of which 26 are billable, their utilization rates will look like this:
Each of these numbers tells a different story, and each form of measurement serves a different purpose.
So, what are the key differences between capacity and utilization? Let’s break it down.
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As you may have realized, an employee’s capacity has a huge impact on their utilization rate. But what impact does utilization have on capacity?
Both high utilization and low utilization reveal a lot about workforce productivity, helping you accurately forecast teams’ capacity moving forward and make informed decisions around hiring.
High utilization suggests employees are incredibly productive and use most (if not all) of their available time. This means the workforce is booked and busy, with limited capacity to take on new projects.
The only way to realistically increase capacity and free up resources for new projects is to scale your workforce by hiring new people. Remember, asking employees to keep working longer and longer hours is never the answer to increasing capacity in the long run!
Low utilization means employees are not using enough of their available time productively. This could mean that they’re lacking motivation or that demand from clients is lower than predicted, with capacity outweighing demand.
You can fix the latter issue by either taking on new projects or downsizing your workforce if the market demand is not there.
The end goal is to get the most out of your resources by optimizing utilization and balancing capacity with demand. Here are our top tips on how to do just that.
Capacity forecasting is all about predicting what resources you’re going to need to deliver all the projects in your pipeline.
This strategic process uses historical capacity utilization rates to predict future demand, helping anticipate demand fluctuations, growth opportunities, and market changes, allowing you to plan accordingly.
Capacity planning focuses on matching supply to demand. In other words, it’s all about laying out how you’re going to use your resources to meet the capacity requirements identified through forecasting.
This includes understanding which roles will be required for which projects, when, and for how long, allowing resource managers to ensure you have the resources you need when you need them.
Without strategic capacity planning, you may fail to anticipate a spike in demand for a specific resource, meaning you can’t deliver a project on time, leading to disappointed customers.
You can also use capacity planning to understand what capacity you have available right now, potentially allowing you to capitalize on opportunities!
Goodbye, spreadsheets! Capacity planning software is a must if you want to forecast your future resource needs accurately based on live data and your pipeline.
The best tools provide resource managers with all the information they need to map capacity for the coming months at the click of a button, supporting effective capacity planning, reporting, and more.
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As we’ve covered, you can’t expect people to consistently achieve a 100% utilization rate. First of all, it’s not healthy; secondly, it’s not realistic, meaning your team will constantly be falling short of their target.
So, if you want to help your team reach their utilization goals, make sure they’re reasonable. A good rule of thumb is that you shouldn’t expect billable hours to account for more than 80% of their time.
Not only is it normal (and encouraged) for people to take breaks to enjoy a coffee or a catch-up with their colleagues, but this leaves room for non-billable tasks, too.
One of the fastest ways to increase your team’s utilization is to allocate resources intelligently.
By tracking your employees’ skill sets and interests, you can ensure people are assigned to the jobs most likely to engage them. What’s more, in the event that demand for a specific resource is high, you can quickly identify other employees who are well-positioned to pick up the slack.
Tracking utilization is easy. That is, it’s easy when you use a resource utilization tool. The best resource utilization tools make planning, tracking, analyzing, reporting, and goal setting more straightforward by automating your calculations using data from your project planner.
At Runn, we’ve made understanding utilization easier than ever before with highly engaging resource utilization charts, heatmaps, and reports. These help resource managers do all this and more:
If you want your team to spend more time on revenue-boosting activities, you need to automate repetitive, time-consuming, non-billable work. Admin tasks like data entry can often be automated, freeing people up to focus on more complex tasks and strategic initiatives (AKA billable tasks).
Wondering how these related terms fit into the equation? Get up-to-speed with these handy definitions.
Capacity utilization refers to the percentage of a person’s capacity that is being utilized. The optimal capacity utilization of an individual is around 80%, as no one can be productive 100% of the time!
Theoretical maximum output refers to the highest possible level of actual output something can achieve under perfect conditions. This is usually used when measuring the efficiency of machines or a production process, not people.
Excess capacity means that a company isn’t using all its resources. This is usually signaled by a low capacity utilization rate.
