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What is capacity management, and why is it important?

Using capacity management lets you turn guesswork and intuition into a more scientific endeavor.
From Team '23

Tempo Team

Capacity management is a project management and resource allocation technique. By using capacity management skillfully, organizations dramatically raise the chances that the time and professional skills of team members (and freelancers) can be optimally used to fulfill the strategic goals of the organization.

Using capacity management lets you turn 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, without overstaffing or overbooking their talent pool.

Capacity management: Make realistic decisions while respecting staff and the organization's strategic vision

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.

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 your current capacity

  3. Accounting for current and future demands on your capacity

  4. Strategically allocating resources to meet your goals

  5. Monitoring final capacity usage, analyzing past projects

  6. Recalibrating benchmarks for the next project, using data from the past and a fresh assessment of your current capacity and demands

Why capacity management is important

Capacity management forces organizations to make deliberate choices to maximize their capabilities. The ultimate goal is to have resources available to create value for customers and stakeholders, while balancing risks and budget constraints.

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

Understand staff limitations & capabilities

Organizations can be more confident in what work a staffer can perform, the timeline they can perform it in, and how much can be asked of them before quality and consistency of work declines.

Learn where staff may need additional training or new skills

Capacity management forces businesses to think more deliberately about increasing staff productivity. This may result in changing hiring and onboarding practices, or adding other resources and extra time for training and skill-building.

Create and manage budgets

Bad things can happen when budgets don't reflect reality. 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 have 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.

Minimize burnout and know when you need to hire

Failing to anticipate the needed resources to accomplish a goal directly leads to understaffing. This is another common cause of "crunch" and other forms of overburdening employees.

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.

Make data-informed decisions

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 something 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 five 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.

The different types of capacity management

The word "capacity" itself can 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.

However, 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.

Other types of capacity management:

  • Workforce capacity management concerns itself specifically with having skilled people available to perform work. In many service-based industries, capacity simply refers to the supply of workers — but in professional project management, 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 multiply the number of workers available to perform the needed work by the number of hours each person is available to work.

  • 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.

  • Resource capacity management refers broadly to the total sum of resources an organization will need to meet the calculated demand level. In the example listed above, the project requires people to complete tasks, but it also requires desks, software, laptops, and subscriptions to tools like Jira. It might also require training, orientation, or planning meetings, or raw materials to fabricate, fuel for machines, anything needed to create or support the products.

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 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. 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.

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.

Many projects 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. 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.

Strategies for managing capacity

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.

Lag strategies for capacity management reduce the risk of spending money on underused resources. However, rigorously avoiding overspending creates other types of risk. For example, an app that becomes wildly popular 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 its number of app installations, 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 they don't end up fully using. 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 be ready to respond if their resources aren't needed. This often manifests in the form of layoffs and adjustments to the forecasted demand. It also means the business missed opportunities to invest in other, more valuable projects while it was focused elsewhere.

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.

It may sound ideal, but 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 eventually prove insignificant. Further, organizations may struggle to engage in long-term planning 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. The organization must anticipate the latency in bringing new resources up to speed.

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 is 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.

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.

Approach goals realistically and with hard data in hand

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." Capacity management is a good combination of the two.

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 so projects have the best chance of success. In the reactive sense, capacity management creates a data trail and a historical record for each process so 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 shape the next project.

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 into Tempo Timesheets and Planner Tempo Capacity Planner. Tempo solutions make it easier to track time and to create a solid record of team productivity, resource requirements, and time-based budgeting.

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