Capacity Planning: A Comprehensive Guide for Agencies and Professional Service Firms

Lucija Bakić

November 10, 2023

How can you get the most out of your agency’s time and money? Keep reading to find out all about the best capacity planning techniques.

Key Takeaways

  • Capacity planning is the process of determining the resources and capabilities necessary for meeting the demands of a business or organization.
  • Capacity planning provides numerous benefits, including improved project delivery, financial benefits, and increased business sustainability and resilience.
  • Capacity planning software can help you streamline the process of managing resources by streamlining administrative work and forecasting key agency insights.
  • Implementing a capacity planning strategy involves developing a resource plan, considering internal or external factors that may affect it, and managing it with capacity management techniques.

What Is Capacity Planning? A Fundamental Overview

Capacity planning is the strategic process by which agencies and professional service firms determine the production capacity needed to anticipate and meet service demands.

The balancing of current capacity with projected future capacity is an integral part of the overall resource planning process. Capacity planning involves a thorough analysis of an agency’s resources, identifying potential bottlenecks, and assessing how resources are being utilized.

Effective capacity planning ensures that resources are not wasted or underutilized, leading to improved financial performance, higher client satisfaction, and increased team productivity. Ultimately, it provides a roadmap for organizations to optimize their operations, making it a critical tool for digital agencies and professional service providers. Gain a deeper understanding of capacity requirement planning to better forecast your needs.

Capacity Planning 101: Key Terms and Concepts

Understanding the essential terminology and principles associated with capacity planning, such as billable hours and resource allocation, is crucial for effective management in an agency environment. Let’s take a look at some of the most commonly used concepts that you might come across while researching capacity planning.

Defining Key Concepts

  • Billable Hours: The number of hours that employees work on client projects that can be charged to clients. This is a key metric for client-facing agencies. Efficient capacity planning often aims to maximize billable hours while avoiding employee burnout.
  • Resource Utilization: One of the main metrics for resource planning success that shows how efficient your resources are. High utilization rates indicate that employees are billing a significant portion of their time, which is crucial for profitability on hourly-priced projects.
  • Business continuity: Ensuring that your organization can continue to operate and deliver services to clients even in the face of disruptions. This involves putting plans in place to manage agency and team capacity in emergencies or other unexpected situations.
  • Demand forecasting: Anticipating future demand for the agency’s services. Demand forecasting supports planning capacity and ensures that there are enough resources to meet client needs and resolve resource conflicts.
  • Resource management: Encompasses the allocation and optimization of all types of resources, such as human, technological, and financial, to ensure efficient project delivery.
  • Project Management: Effective agency project management ensures that projects are completed on time and within budget. It includes the management of tasks and overall project initiatives. Capacity planning is vital in allocating the right resources at the right time to ensure successful delivery.
  • Workload Forecasting: Similarly to demand forecasting, workload forecasting is another way to anticipate and resolve future demand. It predicts employee workloads to ensure that the organization has enough staff with the right skills to meet client needs.
  • Revenue Forecasting: Involves the predicting of future income based on billable hours, cost rates, and client contracts, all of which are directly impacted by capacity planning.
  • Human Resource Planning: Ensuring that the organization has enough staff and that they are allocated effectively. This is another critical part of capacity planning in professional services firms.
  • Overhead Management: Includes the management of various non-billable expenses needed to run your agency. Managing non-billable hours and overhead costs is essential to maintaining profitability, and it requires careful capacity planning.

The Role of Time Tracking

For client-facing agencies, managing billable and non-billable hours is crucial for effective resource allocation and capacity planning. Time tracking helps identify how employee hours are distributed across project tasks, which can highlight potential inefficiencies and areas for improvement.


TOOLS SUCH AS PRODUCTIVE INCLUDE AN INTEGRATED BILLABLE HOURS TRACKER

Moreover, time tracking can reveal patterns in task allocation and execution that might otherwise go unnoticed. This helps managers optimize workflows and resource deployment. A comprehensive capacity planning template often includes a time tracking component, which simplifies the process.

Related: 13 Best Agency Time Tracking Software in 2023

Streamlining Success: Key Benefits of Capacity Planning

One of the main reasons for project failure is found to be scope creep. According to research published by IEEE, scope creep is caused in large part by three main factors: time constraints (25%), budget constraints (24%), and insufficient resources (12%). All of these risk factors can be anticipated and resolved with efficient capacity planning. If you know exactly where your resources are tied up, you can easily reallocate them to satisfy resource conflicts.

This is why capacity planning is the backbone of your business — doing it right has an extensive effect on all of your agency operations. This includes granular concerns, such as task decision-making or improved project outcomes. It can also have an impact on broad agency issues, such as your strategic planning alignment and financials.

Let’s explore the key benefits of capacity planning one by one.

Optimized Resource Allocation

Optimized resource allocation means that your resources are well-balanced across multiple projects. This includes taking into account various factors, such as resource availability or working hours, seniority levels, and even personal traits such as particular employee skills or affinities. All of these can contribute greatly to preventing burnout and improving job satisfaction.


WITH PRODUCTIVE’s reporting, YOU CAN EASILY CHECK AND MANAGE YOUR TEAM UTILIZATION

The best way to ensure that you’re using your resources correctly is to track your agency utilization rate, or the difference between non-billable and billable hours. The standard for production-level staff is somewhere between 70 to 90%, depending on your industry (Promethean Research). As important as it is to maintain your utilization, don’t focus too much on maximizing it. In the end, non-billable tasks can be just as important for your agency’s sustainable growth. Effective IT capacity planning strategies are essential for managing your technology resources.

Learn how to manage your agency’s utilization in crisis times:

Improved Project Management and Delivery

With a well-executed capacity plan, a project manager can accurately anticipate project demands and delegate tasks based on their team availability and skills. Considering that a majority of project managers handle between 2 and 5 projects at the same time (RGPM), it’s essential that this resource plan allows for easy context switching and resource reallocation.


PRODUCTIVE SUPPORTS SUCCESSFUL OUTCOMES WITH CUSTOMIZABLE PROJECT VIEWS

Ultimately, good capacity planning means that you’ll be able to deliver projects on time and within scope more reliably. This has an impact on your client satisfaction and creates a higher potential for repeat business. If you need more convincing, research in financial services shows that a 5% increase in customer retention produces more than a 25% increase in profit (Bain & Company).

Financial Benefits

When adopted strategically, capacity planning can yield significant financial benefits. In fact, according to a study performed in the SaaS industry, it can improve overall agency profit by as much as 10% (Business-Driven Long-Term Capacity Planning for SaaS Applications).

In particular, using advanced resource management software can help you get real-time insights into key agency metrics, as well as predict your future agency performance.

Orion Jensen
CEO
Clear Launch

One way to get a pulse on the business is to get the monthly financials, but for the monthly financials to come in, it takes the accounting department about 15 days after the month ends before we get a picture of how we really did that month. Whereas, with the financial tools that Productive offers, you can check it on a daily basis. We have clear visibility at any given time.

Key financial benefits of automated capacity planning include:

  • Improved Financial Forecasting: Capacity planning provides crucial data that enhances accuracy in financial forecasting and budgeting.
  • Profit Maximization: By aligning capacity factors with demand, agencies can maximize their revenue potential and save on costs.
  • Reduced Risk: Effective capacity planning minimizes financial risks associated with over or under-utilization of resources.

Strategic Business Planning

Capacity planning serves as a crucial tool for forecasting future needs. When you’re able to plan your resource availability for the future, you can identify exactly when and which resources you’ll need to support expansion. You can also decide which client projects you’re able to take on or guide your sales strategy by targeting underutilized services. Learn more about finite capacity planning methodology to optimize your production scheduling.

We have team X, whose Scheduled/Available ratio is 110% when looking into the upcoming quarter. This means that we’ll need an extra 10% of our current capacity to be able to do the work we have scheduled. Then we translate those percentages into the numbers of full time employees we actually need and signal this to HR so that they can start with the hiring process.

By aligning your capacity planning with your strategic business planning, you can support improvements at all levels of your agency management.

Enhanced Agility and Flexibility

Capacity planning allows for enhanced agility and flexibility, two essential qualities that empower agencies to respond to evolving market conditions and client demands. By maintaining a firm grasp on capacity and availability, your agency will be able to align its strategy with industry realities more easily.

Additionally, optimized utilization means streamlining time that would otherwise be spent on administrative tasks. This allows your resources to be more flexible and creative by giving them the time they need to work on innovative projects and strategic agency initiatives. For strategic growth, consider these long-term capacity planning approaches.

Data-Driven Decision Making

Capacity planning supports informed decision-making by providing two main benefits: generating key insights on your time, money, and resources, and providing enhanced visibility into all three. According to the Global Agency Landscape 2022 Report, a majority of agencies miss out on tracking their business health in real time — for example, only 43% reported tracking their forecasted revenue, and as few as 18% manage their project budget burn rate.

This means that you can leverage your resource planning data to get a competitive edge in the professional service landscape. Analyzing your key agency insights will help improve project transparency and accountability, contributing to lasting client relationships.


BENEFIT FROM productive’s ADVANCED project budget and FINANCIAL MANAGEMENT

Building Resilient and Sustainable Operations

Finally, resilience and sustainability are both synonymous with strategic capacity planning. With a resource plan that encompasses the real picture of your agency’s resources, you’ll be able to gauge the periods in which your resources are at risk of being overutilized. This promotes proactive adjustments, as well as sustainable business practices. Monitor these key metrics for capacity planning to ensure efficiency. With a reactive resource plan that adapts to potential changes, you’ll also be better equipped to weather the various uncertainties and challenges associated with end-to-end project management.

What Are the Different Types of Capacity Planning Strategies?

Agencies can employ various capacity planning strategies to optimize operational efficiency and profitability. These include: Lead, Lag, Match, Adjustment, and Hybrid Strategies. Each has its own distinct advantages and is applied according to an agency’s particular needs and circumstances.

Lead Strategy

A lead strategy is a proactive strategy that consists of increasing capacity before it’s needed in order to stay ahead of demand. When it comes to challenges, utilizing a lead strategy requires:

  • Deep understanding of market trends and demand prediction
  • Accurate insights into current agency resources and utilization
  • Knowledge of specific agency dynamics, such as hiring cycles or training time

If a lead strategy fails, it may result in decreased agency utilization rates and higher agency overhead — the most common example would be overestimating demand, causing employees to remain unutilized. If it succeeds, it usually means gaining a competitive edge, leading to higher customer satisfaction and potential market share gains.

Lag Strategy

On the other hand, a lag strategy is a reactive approach that entails adding capacity after demand has exceeded resource availability. While this strategy may be cost-effective in the short term, it can lead to decreased client satisfaction and loyalty in the long run.

Therefore, it’s necessary to monitor the critical path of resources — the point at which resource constraints will negatively impact your client relationships — and respond to it quickly. For example, certain industries that experience high peaks and low plateaus throughout the year, such as consulting agencies, might resort to mandatory overtime to compensate for high demand.

Match Strategy

Match strategy involves adjusting your capacity in line with demand. It avoids the risks of both lead and lag strategies, including overinflating resources or causing client churn. However, a match strategy is the most difficult to implement in the often volatile professional services environment, as it requires the careful monitoring of industry patterns and high agency flexibility.

The main steps of a match strategy are:

  • Staff management: Adjusting the number of employees to match demand.
  • Supply management: Regulating supply to match demand, avoiding excess or shortage.
  • Equipment utilization: Maximizing the use of resources to match demand levels.
  • Dynamic adjustment: Continual review and adjustment of capacity to ensure optimal efficiency.

Adjustment Strategy

The adjustment strategy aims to match demand with capacity by introducing adjustments to specific agency processes or systems. The most frequent way to utilize the adjustment strategy is by hiring part-time employees or freelancers to cover periods of higher demand. Although this provides a high level of flexibility without the complexity of using a match strategy, it may lead to issues with consistency and quality.

The high turnover rate and the use of unskilled employees both contribute to a high error rate, which means that more supervisors are needed to ensure that jobs are performed according to specifications.

Source: Match Supply and Demand in Service Industries

Therefore, agencies that use the adjustment strategy should develop strategies to mitigate risks, such as a reliable contractor onboarding process.

Hybrid Strategy

A hybrid strategy involves tailoring your capacity planning by combining elements of multiple approaches. This strategy offers a balanced and customized approach, capturing the benefits of multiple strategies while mitigating potential drawbacks. The challenge of using a hybrid strategy is that it requires a certain level of agility and flexibility in your agency operations, as well as careful planning and analysis.

Using a hybrid strategy might look something like this:

  • Using a lead strategy during periods of anticipated demand increase
  • Employing a lag strategy when demand is expected to decrease
  • Applying a match strategy for stable demand periods
  • Implementing an adjustment strategy to account for unpredictable fluctuations

Using a practical example, professional service agencies might anticipate periods of lower demand during the summer months, and thus decide to scale or downsize their capacity planning strategy according to certain seasonal trends.

Scenario Planning

Scenario planning is one of the most crucial processes for agencies that want to successfully implement their capacity planning. With scenario planning, you can more easily employ a hybrid strategy or a contingency approach that tailors capacity for fluctuations in demand.

Scenario planning is most useful for agencies that:

Operate in uncertain conditions and want to manage risk factors;
Use a process that combines strategic analysis with creative thinking;
Allow for thinking about future outcomes while taking action in the present.

Source: Scenario planning: Reflecting on cases of actionable knowledge

This strategy’s primary advantage lies in its ability to prepare organizations for various possibilities, ensuring readiness for different future states. However, it can be challenging to implement due to the time-consuming and complex process of developing several comprehensive plans.

Tools of the Trade: Navigating Capacity Planning Resources With Software

In order to successfully implement a capacity planning strategy and get the benefits of optimized processes, using the right agency software is crucial. These tools can help you automate your processes, get more accurate data, and improve your project stakeholder collaboration.

Here’s a brief comparison of some of the best options currently available.

1. Productive – The All-in-one Agency Management Software for Team Capacity Management

Productive is a comprehensive agency management tool that combines capacity planning, budgeting, and project management in order to deliver end-to-end agency support. It’s designed for professional service agencies of all shapes and sizes.


productive helps you balance WORKLOADS to ENSURE healthy utilization

Key features include:

  • Time Tracking: Productive supports the tracking of billable and non-billable hours with an integrated timer, manual time entry, and even automatic timesheet creation based on your resource scheduling.
  • Capacity Planning: Create highly detailed resource plans that take into account holidays and agency-specific employee leave. Support your scenario planning and project delivery by forecasting your project budget burn and profitability margins, as well as checking utilization across various key metrics.
  • Financial Management: Build and manage your budgets on Productive, whether fixed, hourly-priced, retainer, or hybrid. Manage hourly rates, generate brand-friendly invoices, and handle your external expenses with purchase orders, all on one platform.
  • Reporting: Productive offers more than 50 agency-focused templates that you can populate with additional parameters thanks to custom fields. Get the benefit of accurate, real-time data at your fingertips.
  • Project Management: Get full visibility into your project progress and handle your task management. Customizable notifications will help you stay on top of updates on whichever platform you prefer to use.

Additional features include: Sales, Docs.

Integrations include: Xero, QuickBooks, HubSpot, Breathe, Zapier, Slack, Jira, and more.

Why Consider Productive as Your Capacity Planning Software?

One of Productive’s best features is that it can help you cut down on the number of tools you utilize daily, streamlining processes and costs. You can integrate and standardize your workflows on one platform to get more accurate data and simplify collaboration for cross-functional teams.

Bryan Casler
Vice President of Digital Strategy
4Site Interactive Studios

We used to have a project management tool, a time tracking tool, a support tool, a way we handled opportunities and sales-driven processes. Those were all separate tools that we had, and it wasn’t good. It also meant that all that data was being lost every time we switched between tools, or we had to find a way to normalize the data between them. And now, the fact that it’s all in one, it’s really a game changer.

Additionally, Productive provides both easy resource allocation, as well as advanced insights into agency financial metrics. This can help you get the most out of your capacity planning strategies.

When to Consider Alternatives

Productive might not be the best solution for agencies that are looking for a specialized tool that offers just capacity planning at a lower price. However, consider that investing in a more comprehensive choice might be a more cost-effective solution in the long term.

Optimize Your Agency’s Capacity Planning

Get the most out of your resources with a comprehensive agency management tool for scheduling, planning, and financial forecasting.

Book a demo

2. Resource Guru – An Affordable Capacity Planning Alternative

Resource Guru is a resource management software with scheduling, leave management, capacity planning, and essential forecasting features.

Key features:

  • Easy resource allocation with drag-and-dropping
  • Team workload balancing
  • Staff absence management
  • Utilization tracking and management


SOURCE: resource guru

The Benefits & Downsides of Resource Guru

Resource Guru reviews on Capterra state that the tool “only really does one function, but it does that function very well”. This makes the software a good alternative for agencies who are looking for a more streamlined, affordable way to manage their resources. As for the most notable downsides, Resource Guru doesn’t offer reporting as part of its most affordable plan. Additionally, some users find that its integration options with other productivity-based agency management tools are lacking.

3. LiquidPlanner – A Specialized Alternative for Resource Scheduling & Planning

LiquidPlanner is a resource scheduling software that supports time tracking, scheduling, workload balancing, and project prioritization.

Key features:

  • Essential time and task management
  • Filtering by people, portfolio management, and projects
  • Integrated time off management
  • Customizable reporting dashboards


SOURCE: liquidplanner

The Benefits & Downsides of LiquidPlanner

LiquidPlanner can be a great tool for agencies that want to improve their scheduling and get visibility into their resources. However, some features are notably lacking from this software, such as a timer to accurately capture your billable hours, as well as budgeting or billing capabilities. This means that you’ll need to invest in a separate tool in order to cover these key agency processes.

What Are the Best Practices for Capacity Planning?

Implementing successful capacity planning usually requires having both a strategic and creative mindset. This includes having a firm grasp on your resources in the context of broader agency initiatives, while having the flexibility to adjust your approach according to demand fluctuations.

A good resource manager will be willing to learn and adjust their strategies as they go. This means accepting that even the most carefully set plans are liable to change down the line. It also includes being ready to implement this change, not just retroactively, but by anticipating it.

For this, a deep understanding of your agency processes and external factors is necessary. A way to ensure that your agency is ready for whatever is coming next is by performing detailed scenario planning and forecasting analysis. This flexibility, in combination with the application of proven strategies and continuous learning, is key to successful capacity planning.

Learn more about forecasting with capacity planning software:

How to Develop a Capacity Planning Strategy?

To develop a capacity planning strategy, you must first map out your company’s current performance and future goals. Then, you must identify the resources necessary to bridge the gap between these two states, while considering your agency’s unique operational structure, goals, and challenges. Key stakeholders should be involved in this process to align the capacity planning efforts with overall business objectives.

Here are the essential steps to follow:

  • Analyze the current capacity and identify gaps.
  • Forecast future capacity needs based on business goals.
  • Plan for capacity adjustments to meet those goals.
  • Implement, monitor, and adjust the strategy as needed.

Consider implementing your strategies across short, mid-term, and long-term initiatives. This includes making sure that you’re handling your capacity on a day-to-day, quarterly, and even yearly basis. How far you’re able to look into the future can depend on your specific industry or agency circumstances, but this is a good rule of thumb for enhancing your agency’s operational efficiency and profitability.

Many organisations have a day-to-day planning method where all detailed tasks are allocated with usage of planning software to individuals. In these organisations a medium-term-resource-allocation is not used. But to couple the day-to-day planning to the strategic business plan, this medium-term-resource-allocation is absolutely necessary.

Source: Human resource allocation in a multi-project R&D environment: Resource capacity allocation and project portfolio planning in practice

How to Create a Comprehensive Capacity Plan?

After identifying capacity gaps and forecasting future needs, the next step is creating a comprehensive capacity plan.

To start, outline all resources and their current usage levels. Then, map these against anticipated needs. Identify any surplus or shortfall and devise ways to reallocate or augment resources accordingly.

Your plan should be flexible, accounting for potential changes in demand or resource availability. Include contingency plans to manage unexpected situations. Ensure that you’re being clear and concise so that all project stakeholders can provide relevant feedback.

Regularly review and adjust your capacity plan to maintain its relevance and effectiveness in meeting your organization’s evolving needs.


an example of a high-level resource plan created with productive

How to Implement a Capacity Plan: Turning Strategy into Action

Key steps in the capacity plan implementation process may include:

  • Mobilization: Assembling a dedicated team to oversee the implementation.
  • Communication: Clearly articulating the plan to all involved parties, ensuring everyone understands their roles.
  • Execution: Launching the initiative and monitoring its progress closely.
  • Review: Regularly revising and adjusting the plan to respond to changing conditions and objectives.

If you’re finding that you’re unable to successfully carry out your plans, or your strategy isn’t bringing any improvements, consider going back to the basics. Remember that the fundamental consideration of a professional service agency is its clients:

Focus your energy on the key choices that influence revenue decision makers—that is, customers. They will decide to spend their money with your company if your value proposition is superior to competitors’. Two choices determine success: the where-to-play decision (which specific customers to target) and the how-to-win decision (how to create a compelling value proposition for those customers).

Source: The Big Lie of Strategic Planning

Reconsider your strategy with the human factor in mind. And remember not to get bogged down in the little details. The perfect resource plan and implementation are usually a myth. It can be much more beneficial to be open to iteration and innovation, rather than to stick to numbers, no matter how carefully they were determined.

Successful Capacity Planning: Closing Remarks

For professional service agencies, capacity planning is one of the cornerstone processes. If undertaken successfully, it can bring numerous benefits to all levels of your agency management.

This hinges on the agency’s commitment to strategic implementation, ongoing review, and adaptability in the face of change. By taking a proactive approach through the implementation of modern capacity planning tools and tracking your key metrics, you can get a competitive edge in an ever-evolving industry.

Throughout all of this, remember that capacity planning depends not only on solid strategy but on your willingness to support innovation. If you can achieve a balance between the two, optimized service delivery and agency performance are just within reach.

If you want to find out more about streamlining capacity planning with software, consider booking a demo with Productive, the all-in-one agency management tool.

FAQ

What is meant by capacity planning?

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products or services.

What is an example of capacity planning?

An example of capacity planning is a marketing agency hiring contractors or additional staff in order to meet increased client demand for content strategy and creation.

What are the four types of capacity planning?

The four types of capacity planning are lead strategy, lag strategy, match strategy, and adjustment strategy.

What are the three steps in capacity planning?

The three steps in capacity planning are:

  • Forecasting future business activity.
  • Evaluating existing capacity and resources.
  • Making decisions to achieve a balance between resources and demand.

What is the difference between capacity planning and management?

Capacity planning is the process of predicting future needs, while capacity management involves maintaining the balance between supply and demand by managing resources effectively.

What are the key decisions of capacity planning?

Key decisions include determining the amount and timing of capacity changes, selecting the type of technology to use, and deciding on workforce size and skill levels.

What are the pros and cons of capacity planning?

Pros include improved operational efficiency and customer service, while cons can involve the costs and complexities of adjusting capacity and the risk of inaccurate demand forecasting.

What is capacity planning for employees?

Capacity planning for employees involves aligning workforce capabilities and size with the agency’s expected demand for talent, considering factors like turnover, skill needs, and labor market trends.

What is an example of HR capacity planning?

An example of HR capacity planning is an HR department forecasting the need for new hires based on retirement rates and business growth projections.

What are the two stages of capacity planning?

The two stages of capacity planning are the initial stage, where capacity requirements are estimated, and the execution stage, where the plan is implemented and adjusted as needed.

What is the structure of capacity planning?

The structure of capacity planning typically involves demand prediction, current capacity assessment, and action plans for addressing capacity gaps.

How do you conduct capacity planning?

Conducting capacity planning involves:

  • Analyzing historical data to forecast demand.
  • Assessing current capacity.
  • Identifying gaps between current capacity and future needs.
  • Developing strategies to fill those gaps.

What is a key element in capacity planning?

A key element in capacity planning is accurate demand forecasting, which is critical for aligning capacity with business needs.

What is the first step in planning capacity?

The first step in planning capacity is to forecast future demand for products or services, which forms the basis for all subsequent planning activities.

Optimize Your Agency’s Capacity Planning

Get the most out of your resources with a comprehensive agency management tool for scheduling, planning, and financial forecasting.

Book a demo

Lucija Bakić

Content Specialist

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