What is Capacity Management & How to Do it

If capacity management has been an issue lately, chances are that you're not alone. According to DevPro Journal, every fourth manager ranks capacity as the biggest challenge their software development companies face. It's not easy to deal with a backlog when capacity is limited, developers admit as well. So understanding the concept of capacity management and related processes becomes more important than ever. In this guide, learn the definition, examples, and best practices to improve your capacity management plan.

• What is capacity management?
• Reactive vs proactive capacity management
• Key capacity management metrics
• How to improve business capacity management
• Capacity management software

What is capacity management?

By definition, capacity management is the process of matching your resources to upcoming business demands. It involves forecasting future resource needs, so you can secure exactly the right staff and skills for your project pipeline. 

In turn, capacity is the total output that your business is capable of with the resources it currently has. It is achieved by utilizing those resources effectively to deliver maximum productivity and profit. 

What is the purpose of capacity management?

The purpose of capacity management is to ensure resources are as productive as possible. Put simply, it’s about making sure your resources are earning - not burning - money for your business. 

• Too few staff = you can’t deliver your promises AND your staff burn out
• Too many staff = you undermine your profits AND your staff are bored
• Wrong type of staff = you can’t deliver AND you undermine your profits

Capacity management aims to have just the right number and type of resources to deliver work on time and to a high standard - without wasting money on staff who aren’t fully utilized.  

This is achieved by aligning your resources to the work available, so that their billable time is optimized, without wearing them out.

Capacity management example

Consider a digital agency with a team member, Priscilla, who manages social media campaigns. Priscilla is on a fixed salary, and she has eight hours a day to dedicate to working with clients.

If there isn't enough work to keep Priscilla busy all day, part of her salary becomes an unnecessary cost. 

If there is too much work, she can't keep up and clients aren't seen to. She will be working overtime, getting stressed, and will likely be less productive as a result.

Now imagine this capacity management example applied to every employee in your business. You can understand the challenge and importance of an effective capacity management process.

What causes poor capacity management?

Capacity management can be challenging. It involves:

• Predicting business needs (crystal ball, anyone?!)
• Managing complex resource availability (think holidays, sickness, flexible working, leave etc)
• Adapting to changing demand (such as new projects, withdrawn work, scope creep, budget cuts)
• Constant monitoring changes to available resources 

That said, there are common causes of poor capacity management that can - and should - be resolved. These include:  

• Lack of understanding of the strategic importance of capacity planning
• Not having access to the data needed for effective capacity management
• Decisions being made on gut feeling rather than facts 
• No joint accountability to deliver projects 
• Misalignment or lack of visibility between teams  
• Siloed data, decision-making and KPIs 

For example, in a project-based business, the sales team may have KPIs that require them to bring in a certain number of projects per month. However, if the delivery team doesn’t have the people or skills to deliver those projects, you’ll have a capacity issue. 

This may result in project delays, under-delivery, or the need to hire more staff at short notice. All of which can undermine client outcomes and project profitability.

Why is poor capacity management bad for business?

Poor capacity management is seriously bad for business.

• Lower profitability - due to paying for underutilized resources 
• Lack of predictability - causing peaks and troughs in workload
• Frustrated and unhappy staff - who are either burned out or bored
• Customer attrition - due to lower quality outcomes and low satisfaction
• Lack of agility - making it harder to seize new opportunities or innovate

Don’t worry though. Keep reading for practical strategies and tactics to improve your business capacity management process.

Reactive vs proactive capacity management

Proactive capacity management is about planning your capacity and actively managing it to maximize business outcomes. 

Reactive capacity management is about firefighting and trying to prevent problems caused by emerging capacity issues. 

You can guess which we recommend 🙂

Reactive capacity management risks priority projects not having the resource capacity they need to run effectively.

Without visibility over how its capacity is being used, a business can be caught by surprise and find itself unable to provide its service.

Reactive capacity management example

Take a consultancy, for example. A new client is onboarded and requests a package of work. The manager allocates a consultant to work with them. However, if the manager doesn't check that the consultant has the actual capacity to take on that client, it can create delivery issues.

It can result in committing to work without having the resources required to do it.

The manager now has to:

• Ask the consultant to work overcapacity 
• Scrabble to find an alternative consultant 
• Or disappoint the client

Proactive capacity management, on the other hand, would have anticipated likely needs to ensure the business has enough consultants for future work. And better visibility into resource availability would allow the work to be assigned to a consultant with capacity. 

Benefits of capacity management

Effective capacity management comes with several benefits. Mainly, however, it contributes to efficient resource and project management significantly.

Let’s break down these benefits:

• Better resource management

It wouldn’t be an exaggeration to say that improved resource management is the top benefit of capacity management.

Essentially, when you assign project-specific tasks to different employees while looking at what’s already in their pipeline and planning vacation time for them, you prevent burnout. 

Plus, by optimizing resources, that is assigning tasks based on team members’ strengths, you keep human resources engaged at work. In turn, this helps you improve performance management, deliver better client outcomes, and retain employees.

• Increased client satisfaction

When the best-fit employees work on specific projects, the results are often excellent. To add to that, efficient capacity management means you’re meeting project deadlines in time. 

Both factors — good quality work and work completed in time — increase client satisfaction, helping you retain them and grow your profits. 

What’s more, improved client experiences often translate into referrals and good word of mouth — perks that you can’t ignore.

• Improved project pipeline management and forecast

Having a strong grip on who is at their maximum capacity, what they’re working on, what they’re skilled at, and the number of ongoing projects helps you in two ways.

For one, it assists you in better managing your current production capacity. In turn, this assists in meeting project deadlines and improving client satisfaction.

And two, managing human resources efficiently helps you take on more and better-suited future projects based on available resources.

Learn how to build a capacity report in our recent guide. 💻

Key capacity management metrics

A good capacity management process is the combination of a range of different metrics. Capacity management metrics include:

• Resource utilization levels. Measuring how well individual resources are being utilized compared to their total potential output - their individual capacity. This is particularly important when it comes to expensive resources, which represent a higher cost if not fully utilized.
• Capacity against demand. This metric helps to ensure a business is capable of supplying its market. If there is too much capacity, some resources will be wasted, but if there aren't enough, the business can't meet demand and is missing out on opportunities. To measure demand, look at your resource utilization. The staff with the highest utilization rates is the most wanted by clients. Therefore, in demand.
• Bench management. Bench management refers to the availability of resources for new projects or tasks. If someone is on the bench, it means they're not currently being utilized, and can take on more work. Labor costs are typically a large part of a businesses operating expenses, and if staff members are idle, it can impact company profits.
• Forecast time against actual time. It's important to know how accurate time forecasts end up being. Comparing forecast time for a task against the actual time it took to complete ultimately helps to make better forecasts in the future.

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How to improve business capacity management

The first step in implementing a good capacity management process is to actually prioritize it. Knowing the benefits of a capacity management plan helps to recognize its importance and ensure you actually have one.

A capacity management plan should include details of the businesses current capacity level, both in total and in terms of its financial, human and IT capacity. It should also consider if there's anything on the horizon that will impact on capacity, such as:

• Business changes or upcoming projects
• Upcoming regulatory changes
• Potential technological developments
• Contractual commitments

Three other factors to look at for effective capacity management include:

• Historical data. Go back to capacity management issues you’ve had in the past to identify any patterns. For example, is there a particular season where managing capacity has been a struggle?

• Resource factors. Review if any team members have recently left and how that might impact a work-heavy period. It’s also a good idea to track external resources that you hire on occasion. Keep tabs on their cost rate, work hours, and availability, for example.

• Operational factors. Review and better manage operational factors that can impact how you manage your work capacity. For example, look at how your team manages risk. Similarly, determine how your team manages and communicates with stakeholders and scope creep.

There are also few helpful best practices that can improve capacity management.

1. Allocate capacity according to business priorities. This allows teams to focus on what's important, and projects with a greater potential return to be delivered.
2. Monitor actual business demand. It's important to know the demand being placed on teams. This includes from clients purchasing services, but also from internal projects that enable business growth. Having a good understanding of demand helps to ensure the supply of resources is appropriate.
3. Plan for different scenarios. There are often many different variables in pieces of work. Understanding what these variables are and how they might affect the businesses capacity helps to identify the most efficient solution. This includes understanding resource risk, and planning for if resources are unavailable.
4. Monitor distractions. Distractions can be common in IT in particular, and can pull resources away from priority work. For example, a staff member directly approaches a developer and asks for them to do a coding job for a project they're working on. These small tasks can add up to a significant amount of time spent not focusing on delivering work of greater importance.
5. Plan for change. Among other things, capacity planning is based on forecasts. These forecasts will very rarely be accurate, which may require an adjustment to capacity planning. Not only that, but there are changes within businesses too - a new project may be considered a higher priority than a current piece of work.
6. Be dynamic. Resource capacity planning should be an ongoing process. Once a plan is in place, it's important to update it regularly. An annual capacity planning exercise can help to stay on top of all relevant internal and external factors that impact on capacity.
   

Capacity management software

Capacity management software is a highly effective way of automating a reliable capacity management plan. A tool such as Runn is highly visual and engaging, helping to monitor resource availability and proactively resource priority tasks.

Manual capacity management is laborious, error-prone, and requires regular updates. However, using Runn software enables decision makers to get real time data and inform resource reallocation with confidence.

Here’s a brief rundown of how Runn can help you better manage capacity:

• It gives you live insights into everyone’s work capacity. This includes how much work is on each team member’s plate, how long it’s been since they’ve taken an off, and more. You can also plan and mark vacation time for employees in Runn.

• It helps you maintain a library of resources. This shows you each team members’ strong skills, location, available work capacity, cost charges, and more. The best part? You can set custom hours for each employee showcasing each person’s availability based on their workdays and work hours — a feature that’s invaluable for remote companies.

• It assists you in managing workloads effectively. Runn gives you at a glance view of how each running and new project impacts your team. This not only helps with workload management but also pipeline management.

Runn makes it easy to generate reports on employee utilization, forecast tentative projects, track project KPIs and see variance in forecasts.

Book a demo with Runn today, or try Runn for free.