What is capacity management, and why is it important?

Capacity management is a project management and resource allocation technique. By using capacity management skillfully, organizations dramatically raise the chances that the availability of team members (and freelancers) ready for work can match the demands for their professional skills to be used to meet strategic goals.

Using capacity management allows project managers and other resource-concerned roles to turn what normally falls to guesswork and intuition into a more scientific endeavor. With proper capacity management, organizations can ensure that they are ready to meet the demands of upcoming projects or customer/stakeholder needs, but without risking the chances of overstaffing or overbooking their talent pool.

 

What is capacity management?

In the world of project management, capacity management is a process used to predict project needs and then allocate available talent strategically. The primary goal is to match supply with demand, within budget constraints, with a secondary goal of avoiding over-extending talent and over-investing time when not needed. 

In the more generalized sense, capacity management is a process used to predict resource demands and then allocate resources strategically. The primary goal is to match supply with demand, within budget constraints, with a secondary goal of avoiding overspending on allocating resources that are not needed.

While some organizations try to diligently match supply with demand perfectly, the reality is that there are pros and cons to this strategy (which we will dive into further below). Those engaging with the capacity management process should strive to understand their goals and their budget constraints. They should also set contingency plans for cases when the number of people (or, more generally, the available supply of resources) cannot keep up with project demands or if there are too many people (or an oversupply of resources) compared to the current levels of demand.

In a nutshell, the process of capacity management involves:

  1. Measuring current resources to derive your current capacity
  2. Understanding what resources could be procured and how that will affect (add to) your current capacity
  3. Accounting for demand to utilize your capacity, including forecasting known or likely future demands
  4. Strategically allocating resources to meet your desired level of capacity (many strategies are available, only a few of which attempt to meet demand exactly)
  5. Monitoring final capacity usage, making note of how your actual productive capacity and demands did not meet your estimates
  6. Recalibrating benchmarks as you measure your current capacity and demands, starting the process over

The different types of capacity management

The word "capacity" itself can actually refer to many things. 

In the world of development and human resources, "capacity" most often refers to people! Specifically, the people who are available to perform productive work. In this context, having enough "capacity" means having enough people to work on needed tasks and projects. That way, goals can get accomplished and demands can be satisfied.

However, there are other things that "capacity" might refer to. In the world of IT operations and service management, capacity might refer to the capacity of servers to handle online traffic for a specific application or service. Capacity might also refer to the machines available to produce goods needed to meet consumer demands.

Listed below are some of the most common types of capacity management used across global industries.

Workforce capacity management

Workforce capacity management concerns itself specifically with having skilled people available to perform work. In a service-based industry, such as catering, your capacity may refer to your ability to have enough workers available to adequately perform the expected level of service quality.

In the world of professional project management, however, capacity is more likely to refer to your ability to complete a group of tasks in order to meet project deadlines. The project manager (PM) estimates capacity demands by tallying up how much time it will take to perform every single task until the project reaches completion, e.g. 400 hours. The PM can then determine supply by accounting for their current workforce capacity. They can determine exactly how much capacity they have by multiplying the number of workers (or freelancers) available to perform the needed work by the number of hours each person is available to work.

Looking at the hypothetical 400 hour project, it is possible that 10 coding engineers working a 40 hour work week on the project can complete the project in one week. That calculation assumes that the workers can focus 100% of their efforts on the one project (which may not be realistic, more on this later). The PM may also look at the individual availability of each worker per day, while accounting for the fact that the work can sometimes take longer than expected. This type of calculation shows what factors must be considered when using capacity management to make data-backed decisions.

Production capacity management

Production capacity management most often refers to an organization's ability to produce a specific good. In many contexts, the ability to produce a good is determined by the production output of machinery and the amount of time in which the machinery would be in operation.

For example, a company might forecast that there will be consumer demand for 4 million widgets over the next quarter. If each machine is capable of producing 400 widgets every hour, it would take one machine 10,000 hours to provide the needed production capacity. Or 100 machines would take 100 hours to meet the capacity demands. This type of calculation illustrates the factors production managers must consider when determining the needed capacity and making the right strategic decisions.

Resource capacity management

The word "resource" in "resource capacity management" refers broadly to the total sum of resources an organization will need to meet the calculated demand level. 

In many contexts, resources often refers to more than one type of resource. In the project management example listed above, the project may require more than just the exact number of people needed to complete the project tasks. It may also require desks, software, laptops, and subscriptions to tools like Jira. There may also be other requirements, such as training, orientation, or planning meetings before the workforce is able to engage in the project tasks in earnest.

Referring to the production capacity example, the required machines cannot operate themselves wholly on their own. The organization may need 10 workers per machine and three machine engineers for every 50 machines, for instance. Machines require raw materials to fabricate, too. They will also likely have consumable components like grease, ball bearings, labels, etc. In this context, the company needs the resources available not just to have the machines themselves — they also have to have everything needed by the machines in order to run.

Resources can also refer to computational resources available to provide a specific service or to support a specific application for an entire user base. An organization running an app will need to forecast demand and purchase server space as well as other resources required in order for the app to run.

Of course, "resources" can also refer to budget resources, because every business activity costs money. To determine the available budget, the organization may look at its retained earnings or ability to borrow before committing to a specific resource allocation strategy.

In a nutshell, the "resources" an organization is looking at will be specific to the industry it is in, or sometimes even a specific department within an organization. The most important resources to HR will differ from those of IT, and vice-versa. Large scale projects can (and frequently do) require cross-functional teams in order to properly engage in resource capacity management.

 

Strategies for managing capacity

There are several different capacity management strategies that can be used, depending on the needs of the organization and its tolerance for specific types of risk.

The most common strategies for managing capacity include:

  • Lag strategy
  • Lead strategy
  • Match strategy
  • Adjustment strategy

Each is described in further detail below, along with their pros and cons.

Lag strategy

A lagging capacity management strategy involves reacting to demands as they reveal themselves. For example, a company that releases a software product will have a baseline number of engineers and other staff available for work, based on their current budgetary needs. They will only increase the number of staff available when a specific demand requires them to do so. For example, a new "sister" product may be released requiring a whole new team of software engineers. Or, spikes in demand for the product could create support issues that require more staff to be hired in order to address the issue.

Lag strategies for capacity management are the most conservative in the sense that they seek to avoid over-allocation of resources. This approach reduces the risk that the organization will end up spending too much money on resources that they do not need. 

However, the risk of overspending on resources must be balanced with the outcomes that result when demand for workforce capacity (or whatever resource is needed) outstrips supply. For example, an app that figuratively explodes in popularity overnight may see sudden outages and a growth in user issues, hurting the owner's reputation at the exact moment they have the opportunity to expand market share and grow revenues. Employees may also suffer from burnout if they are being asked to carry the load while the organization prepares to scale up resources and hire more workers.

Ultimately, those using a lag capacity management strategy must be prepared to account for the latency that comes from acquiring new resources, such as hiring, training, etc., so that the risks of under-allocation are balanced with the risks of over-allocation.

Lead Strategy

A lead capacity management strategy seeks to anticipate resource needs and proactively meet them before they are required. If, for example, a company wants to expand its user base and grow the number of app installations it has, it might preemptively hire and train extra staff in anticipation of need.

Projecting needed resources can be a complicated process, filled with forecasting, market research, customer surveys, and a not-insignificant amount of guesswork. Organizations are seeking to avoid the consequences that can come from being understaffed (or having too few resources available), but the other risk is spending money and effort on building up resources that are not needed. After all, the company may not be able to anticipate factors like market disruptions, growth of competitors, or a tepid customer response to their growth strategy.

Those who engage in a lead strategy for capacity management must, therefore, be ready to respond to instances where the acquired resources are not needed. This often manifests in the form of layoffs and adjustments to the forecasted demand. The business will also encounter opportunity costs, such as innovation projects, that could have been engaged with had they not over-anticipated the need for resources.

Match Strategy

A match strategy for capacity management seeks to constantly adjust the amount of available resources in order to accurately reflect current and near-future demands. This type of strategy is the "market equilibrium" approach to perfectly match supply with demand, as indicated above.

While on paper having an exact match of resource supply to demand may sound ideal, there are cons to the strategy worth considering. Foremost, constantly measuring demand can be a resource-intensive process. It is also fraught with assumptions. These assumptions may get better and more accurate over time, but they nevertheless may cause an organization to overreact to factors that may later turn out to be not-so-significant. Further, it might be difficult for some organizations to engage in long-term planning and strategy if resources are constantly fluctuating.

There are also transitional costs to consider. Whether using freelancers or full-time staff, hiring and onboarding talent takes time. When the talent is laid off (or told there's no longer project work for them), then it is very likely that they will not be available for future work should their resources be needed again. Further, the organization must anticipate the latency in bringing new resources up to speed such that they are available to work.

Overall, a match strategy is best-suited for organizations that have advanced resource calculation and planning capabilities. They must also be willing to trade off immediate capacity availability (found in lead strategies) or overall resource cost savings (as often found in lag strategies) for an ability to meet their resource needs exactly in the middle.

Adjustment Strategy

An adjustment strategy is one of the most common approaches to capacity management because it responds to demands but not in perfect real-time. The organization may take a lag strategy approach for certain time frames or projects and a lead strategy in others. They may even seek to achieve an exact match during times when balancing resource availability with budget constraints is absolutely paramount.

As opposed to a match strategy, where work put into constantly calculating the current and near-future demand, an adjustment strategy responds to indicators on a less-frequent basis. The timeline for adjusting the strategy could be quarterly, monthly, or in some cases even weekly. Again, the key is that the organization seeks to use the exact strategy needed given the lagging and leading indicators in their particular industry.

An adjustment strategy could be thought of as the most-balanced approach to capacity management, but it also does forego the strongest advantages of the strategies above. By seeking to be neither conservative nor consistently proactive with resource procurement, the organization may encounter opportunity costs compared to choosing one of the strategies above. 

Nevertheless, an adjustment strategy achieves the strengths found in being both responsive and reactive, depending on the situation, without the level of effort needed to engage with an exact match strategy.

 

Why is capacity management important?

Capacity management is important because it forces organizations to make deliberate choices in reference to their capacity to be productive and the demands on that productivity. The ultimate goal is to have resources available to create value for customers and stakeholders. At the same time, the organization must juggle other goals at the same time, including their tolerance for overstaffing, their budget constraints, their aversion to risks that come with not having the capacity to accommodate sudden demand spikes, and how all of these play into their long-term vision, goals, and mission.

Decisions made in light of these considerations will reflect the priorities of the organization, including its tolerance for various risks. The organization can take any of the above strategies for managing capacity in response, based on their strategic goals.

On top of that, capacity management also forces the organization to stop taking important things for granted, like the number of engineers available to complete a project while managing issues like server outages, bugs, and other forms of unplanned work. Over time, organizations will gain a better understanding of what resources they have available, what resources they may soon need, and how their allocation decisions affect factors like quality of work, employee burnout, budget overruns, etc. Often, these factors not only become a part of the organization's capacity management best practices but also their strategic planning.

The benefits of capacity management

Whether undergoing a capacity management procedure for the first time or the five hundredth time, engaging with the practice can bring the following benefits described below.

Understand staff limitations & capabilities

A lot of assumptions are made regarding what work a staff can perform, the timeline they can perform it in, and how much can be asked of them before quality and consistency of work declines. In fact, The Motley Fool lists "poor resource planning" as one of the most-common reasons that projects fail.

Learn where areas of training and upskills are needed

Using capacity management forces your organization to think more deliberately not just about staff but also how and why they are able to be productive. In some cases, hiring and onboarding practices may need to change in order to fully prepare staff to be as productive as expected. In other cases, the organization needs to build in additional resources and time for training, skills building, or just even more-fully understanding requirements through conversation and discussion.

Create and manage budgets

Bad things can happen when budgets don't reflect reality. Budgets should fully allocate for all resources required to accomplish a goal or complete a project. Yet, all too often, aspirational budgets cause team leaders and staff to make-do with inadequate resources. Understaffing a project to save on labor costs without compromising the project timeline can lead to extensive unpaid overtime — the dreaded "crunch" many engineers know all too well.

On the flip side, overestimation of needed resources and overallocation of budgets can lead to low productivity and even low worker morale if people are onboarded with nothing to do. Budget surpluses also create major opportunity costs; that money could have have been spent elsewhere to further goals like innovation, continual service improvement, or making employee pay more competitive.

Overall, capacity management makes leaders in an organization take a hard look at the resources needed to actually make projects happen and to become more realistic and accurate when projecting the budgets needed. 

Minimize Burnout

Failing to anticipate the needed resources to accomplish a goal directly leads to understaffing, and understaffed teams are often then asked to make do with what they have. This is another common cause of "crunch" and other forms of overburdening employees just to spin the meager resources they've been given into gold.

Burnout can also manifest when things go wrong with no clear accountability ("we're sorry that these issues keep coming up, but we're understaffed right now…") or when employees are asked to take on too many roles and responsibilities. Part of capacity management is understanding and respecting what each staffer is capable of. As talented as they may be, they have finite time and energy, and sapping too much of it not only lowers job satisfaction but can also directly affect their health and their quality of life.

Know when you need to hire

Whether using a lag, lead, match, or adjustment strategy, capacity management takes a page out of the lean manufacturing book by creating signals to indicate when it's time to "pull" more resources into the production cycle. The whole point of capacity management is having enough resources (e.g. staff) on hand to accomplish the stated goals, which for many companies means hiring enough personnel to make it all happen.

Make data-informed decisions

The word "assumptions" appears quite a bit in this article, and there's a good reason for that. An unfortunate fact is that human beings are actually quite bad at estimating time. We're unrealistic about projecting the time it might take to do something, and then we often have an inaccurate memory of exactly how much time was actually spent to get it done.

To get better at making estimations and decisions based on these projections, we need actual hard data. Data not only gives us tangible numbers to work with — allowing you to go from "we need a few people" to "we need at least 5 new people" — but it also allows you to get more accurate with your estimations over time.

Most importantly, data acts as a record to reflect on times when mistakes were made, predictions were inaccurate, or even when things went extremely well. Data can be used to prove why certain projects went well, why some went over time/budget, and why some utterly fail. And from these lessons, organizations can improve decision-making and get better at long-term planning with their feet firmly on the ground.

Capacity management best practices

Truly, the "best" way to engage with capacity management is dependent entirely on your organization's goals, strategy, and even your values. With that said, here are a few general recommendations that can help make capacity management procedures more useful in order to achieve better, more-consistent outcomes.

Calculate resource capacity using historical time data

Use hard data from your own teams' time logs to more-accurately calculate your current resource capacity. Also, note the level of context-dependent nuance you may see in the numbers. Certain teams may have a higher level of productivity per-hour, as may certain tasks. You may also notice time-based fluctuations in productivity, such as people being less productive on Fridays, at the beginning of the quarter, etc.

Use these numbers to create a range of possible productivities, and incorporate this understanding into your capacity estimates. You may decide to give out a "high, medium and low" number, for example, or simply average everything together to determine a single, tidy hourly rate of productivity. This rate can, in turn, allow you to understand your current capacity and anticipate any changes needed to meet upcoming demands.

Establish resource requirements based on past performance

Echoing the point above, look at historical data to tell you the most-accurate story of how many total hours it might take (and how much capacity is needed) to complete a project. Also, consider building in a cushion to anticipate issues like bottlenecks, sudden staff unavailability, or certain tasks taking more time than expected.

Prioritize projects, and allocate resources accordingly

Capacity isn't determined in a vacuum! In other words, allocating resources towards one project or group of tasks necessarily takes that time and talent away from other possibilities. Accordingly, capacity management should involve determining the best places to allocate resources in order to achieve the organization's strategic goals. Ultimately, every goal should come back to creating value for customers and stakeholders, so use your understanding of those areas along with hard metrics (customer surveys, earnings statements, etc.) to determine the priority projects that most deserve to diminish your overall capacity for work.

Make time for training and project onboarding

Always always build in time to get everyone up to speed on a project before it is expected to hit the ground running. That maxim applies whether we're talking about new hires or seasoned veterans; even if the amount of time needed for each greatly differs, it's still non-zero!

Many projects also need time spent for leadership or the team as a whole to come together, define scope, go through requirements, get approval, and ultimately start work on the very first project tasks. This preparation is required in most organizations, even if it's not built into capacity management. Also, without the preparation, the project may run into issues like scope creep, unplanned rework, misalignment between teams, and other factors that cumulatively impact capacity, productivity, and availability to work.

 

Conclusion: Capacity planning means making realistic decisions while respecting staff and the organization's strategic vision

The Boy Scout motto is "always be prepared," and one of the most common phrases repeated to modern organizations is that "you can't manage what you can't measure." Combining the two, there's the lesson that every organizational project or goal should be approached deliberately, realistically, and with hard data in hand. That's what capacity management is all about.

It's important to note that capacity management can be both proactive and reactive. Proactively, it allows PMs and other organizational leaders to engage in careful preparation. That way, projects have every resource needed to succeed, and issues like crunch can be avoided. In the reactive sense, capacity management creates a data trail and a historical record for how each project was allocated resources. Regardless of whether the project succeeded or failed, organizational leaders can learn deep lessons about what their teams are capable of, what talent may be needed, and exactly how long it takes to get great work done.These lessens can then be applied to the next project ahead.

If you want to start improving your ability to track employee time, create benchmarks for productivity, and ultimately begin resource planning and capacity management with the mindset of a data scientist, look no further than Tempo. With Tempo Timesheets and Tempo Planner, we make it easy to track time and to create a solid record of team productivity, resource requirements, and time-based budgeting. With this information in hand — and with new features on the way — you can get smarter and more accurate about your capacity for the next amazing project on the horizon.

Schedule a demo to learn more about Tempo today!
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