Introduction
One of the questions we spend a lot of time worrying about as agency owners and executives thinking about is balancing our capacity against the work we need to do for clients. Are we understaffed or overstaffed? How will that change in the future? What happens if we do or don’t sign the deals in the pipeline? What if we do or don’t decide to hire that next key employee?
The larger your agency grows, the more of your time will be spent on these questions, and the further into the future your team will need to be able to look. Failing to do so could mean catastrophic impacts on your team, your growth and your margins. Unfortunately, while capacity planning is a simple concept, it’s much more difficult to execute in practice. In this post, we’ll demystify the most common points of confusion we see our clients face, and lay out some of the core concepts you need to understand in order to effectively plan your capacity needs into the future.
What Is Capacity Planning?
Firstly, let’s lay some groundwork on capacity planning as a whole.
In short, capacity planning is a technique used to look into the future to anticipate your team’s capacity needs. In other words, it’s laying out and analyzing how much work they can handle. An effective capacity plan allows you to make decisions in two main areas of your business: staffing and timelines.
For staffing, you’ll need to know which people, teams or departments need help, and which ones need more projects to work on. It will allow you to understand where you’ll need to add more manpower, or enlist help from outsourced teams.
For timelines, you’ll need to know when to start each project, where each project should end, how many projects to sell, and implications if scope on your projects get out of hand.
A great capacity plan enables your project and operations team to thrive. There are a few ways you can get there, starting with the types of capacity planning that you can do.
Types of Capacity Planning
There are a few ways to go about planning your capacity:
Capacity Planning Strategies
- Simulation Based Planning
- This strategy has your team run various scenarios to preemptively identify potential bottlenecks and other issues with the system, to ensure you’re covered, or enable you to prepare appropriately.
- Agile Based Planning
- Agile strategy focuses more on being informed by what has happened in the past, then leaving plenty of room for ongoing, consistent tweaks to the plan as your projects progress. It’s much more flexible than other approaches.
- Lead Strategy in Capacity Planning
- This is an aggressive strategy for high-growth companies with strong cash-flow. It involves hiring out ahead of capacity needs to maintain the highest speed of growth.
- Lag Strategy in Capacity Planning
- This is the opposite, a more conservative approach, that involves basically not hiring until the last minute or when the demand is already confirmed and required.
- This is best for companies with tighter cash-flow or a fast ramp-up period for their talent
- Match Strategy in Capacity Planning
- This is the goldilocks strategy, basically trying to time your hiring to match demand as closely as possible. Naturally, it’s the most challenging to do and requires a good mastery of both top-down and bottom up resource planning.
But aside from these, you’ll also want to consider which approach you’re looking to take. A top down or bottom up approach:
Top-Down and Bottom-Up Forecasting
While the above strategies can be applied to a certain extent to your forecasting process, you’ll also want to figure out which approach fits your needs best:
Bottom-Up Capacity Planning breaks down your project into smaller tasks, and assigns said tasks to each team member that will be responsible for delivering the work. It’s very precise, and provides great short term insight into what each team member will be working on on a given day.
Here is what that may look like:
Website Project 1
| Task | Person | Hours |
| Animations | Tino | 2.5 |
| Illustrations | Tanya | 6 |
| Color Schema | Devon | 1.5 |
| UX | Dylan | 4 |
| UI | Ashley | 6 |
| Front End Dev | Conrad | 10 |
Top-Down Capacity Planning is the more broad approach that has you create higher level estimates about projects, often rolling tasks up into broader categories (teams, departments, etc., we call them Role Categories) to get an overall view of your capacity.
Here is what that may look like:
Website Project 1
| Roles | Role Category | Hours |
| Designers | Design | 10 |
| Developers | Development | 20 |
Short Term Capacity Planning
To get an idea of short term (this week, next week, this month) capacity, you’re going to want to focus on Bottom-Up forecasting. Remember, that’s listing out all of the tasks needed to complete a given project, assigning them out to your individual contributors and adding approximate time estimates for each task. This will give you an idea of how much of each person’s time is being spent to complete the project(s) that they’ve been assigned to. A broader high level approach won’t give you the answers you need in the short term, but it’s the way to go in the long term.
This method is typically employed for more mature work (confirmed projects that have a clear scope and timeline) and takes place in the project management process. Because it is much more precise, it’s much more difficult to make frequent or material changes to the plan so it’s important not to bog this process down with too broad a time horizon, or with projects that are speculative and immature. Doing so will create a lot of operational drag and is likely to undermine the entire process.
Long term Capacity Planning
By using a Top-Down approach, you’ll be sacrificing some of that precision that you had in Bottom-Up to focus higher level, long term models that are much easier to change and use for simulating different scenarios. The change management of updating each task for each role for each project on a long time horizon is massive – therefore rolling those tasks up to broader segments such as Role Categories will give you a sense of how busy your departments will be and hopefully allow you to act before anything gets out of hand.
This methodology is much better suited for looking at longer time horizons (months, quarters) and dealing with more speculative work that might still be in the sales or contracting process and is susceptible to material changes in scope, budget and/or timeline. It may also not be clear who will be working on the project – all of these changes are much easier to maintain against and simulate using a top-down approach.
Now, knowing the methodologies and models of each method is only half of the battle. The other part is actually putting it to work. Let’s get into how you can actually make this happen.
Top Down Capacity Planning: 4 Steps
Step 1: Analyze the Demand
You can start your Top-Down capacity planning process by analyzing your demand. Outline all of the work currently in your pipeline, starting with work that is confirmed and work backwards towards more uncertain work (unconfirmed deals, pipeline deals, etc.)
You can do this at two levels of detail: high level, or detailed level.
Basic
You’ll need some form of hourly estimate to put towards each project. The simplest starting point for estimating time required to deliver on deals that are in the pipeline is to convert your revenue into planned hours. This can be done by using the following formula:
Expected AGI / Expected ABR
AGI is “Agency Gross Income” which is your core services revenue minus any Pass-Through Expenses such as white-labeled services, print/ad budgets, etc.
ABR is “Average Billable Rate” which is the measure of how much revenue your team earns for each hour of work. If you don’t know exactly what you’re getting for each hour of work, you can pull up your rate card or standard rate, and plug that into the formula.
For example, if you have a project that you’re expecting will bring in $10,000, and your ABR or standard rate is $170, you have a starting point:
$10,000 / $170 = 58 hours to complete.
Advanced
There are of course inherent issues with the basic strategy, because it’s too broad. To take this one step further, you can break down this 58 hours into “Role Categories”. A Role Category is a broad group that collects similar tasks and roles into one bucket. For example, an illustrator and an animator working on a website project may be grouped together in a role category called “Design”.
Try to limit yourself to 5 Role Categories, to deliberately keep things high level. We’ll get more precise when we implement a Bottom-Up practice later on in the post.
Your Role Categories for the same project could look like this:
Website Project 1
| Role Category | Hours | ABR |
| Design | 30 | $150 |
| Development | 20 | $150 |
| Strategy | 8 | $220 |
| Total: 58 |
Step 2: Evaluate Existing Capacity
Next, for Step 2 of your Top-Down method, you’re going to want to model your team’s capacity into the future. Again, you can do this the basic way, or the advanced way.
Basic
The simplest starting point is to look at your capacity for the whole agency. You’ll need to figure out how much Delivery Capacity is available for your team (which can be done using our profitability toolkit here). You can manually calculate this by using the following formula:
Agency Delivery Capacity = Total Capacity x Model Utilization
Where Total Capacity will be each team member’s total hours in a given time period, and model utilization will be what percentage of those hours will be spent on delivering client work (revenue earning activities).
For example, on an annual basis, you may have a team of 10 that all works 8 hours a day, for 5 days a week, which totals 2080 hours yearly. For 10 employees, that’s a total capacity of 20,800 hours. That will be your agency’s Total Capacity.
For your Model Utilization, you’ll need to figure out a realistic but ideal target that your team can hit. A healthy utilization number agency wide (which would include Delivery and non-Delivery team members) would be 50% annually. It would be closer to 60-70% on a per project basis, but let’s stick with 50% for this example.
| Total Capacity | Model Utilization | Delivery Capacity Available |
| 20,800 | 50% | 10,400 |
You can also factor in PTO to this model. Calculate the amount of hours that your team will be taking off (8 hours a day, 20 days a year, let’s say) and we’ll have 160 hours, multiplied by 10 employees. 1600 hours. Then, calculate how many of those hours will be used in Delivery (50%) and we reach a total of 800 hours. This means that 800 of the 10,400 Delivery Capacity should be subtracted to account for PTO.
| Total Capacity | Minus PTO (1600 hrs) | Model Utilization | Delivery Capacity Available |
| 20,800 | 19,200 | 50% | 9,600 |
Psst: The simplest way to model capacity is often to create a “payroll grid”. This means listing all of your delivery and partial delivery employees, along with their weekly capacity and then multiplying that by the number of weeks in a given period.
Want to set benchmarks for your team and agency around utilization? You’d then add delivery/billable expectations and time off / holidays to that grid and model out your capacity and utilization targets for the team.
Example:
Want this exact payroll grid template? It’s included for free in our Agency Profitability Toolkit:
At a very high level, now you know that your team has 9600 hours a year to put towards client work. Monthly, that number looks like ~800. Weekly, ~200. So, if you have a typical project that takes 58 hours to complete, you know that you should be able to take on around 3 of those per week, and have your team still have a bit of breathing room.
58 * 3 = 174 hours / week
Note: by working with Parakeeto, you’d gain access to an agency wide Capacity Graph just like you see below:
The issue with this broad, basic method of capacity planning is that if your planned work in the pipeline is set to exceed the number of Delivery Capacity Available in that time period, all of the sudden you need to hire…but you don’t know which department needs it, since you calculated an agency-wide number.
That’s where the Role Categories come in…
Advanced
Instead of focusing agency wide, a more detailed version of this top down approach can be done using Role Categories. Then, you’ll be able to identify bottlenecks at a slightly more discrete level than agency-wide, while also keeping the process light and easy to maintain.
Here is what that capacity could look like broken down into Role Categories:
| Role Category | Team Size | Total Capacity (minus PTO hours) | Model Utilization | Deliv Capacity Available | Deliv Capacity Weekly (/52) |
| Design | 5 | 9,600 | 70% | 6,720 hrs/yr | 129 hrs/wk |
| Dev | 3 | 5,760 | 70% | 4,032 hrs/yr | 77 hrs/wk |
| Strategy | 2 | 3,840 | 70% | 2,688 hrs/yr | 52 hrs/wk |
You’ll need to decide on hourly estimates for each Role Category for your service offering, like we have done below.
Website Project X
| Role Category | Hours Per Project | Deliv Capacity Weekly (/52) |
| Design | 40 | 129 hrs/wk |
| Development | 30 | 77 hrs/wk |
| Strategy | 8 | 52 hrs/wk |
| Total: 78 |
And then compare them to the planned work that you have in the pipeline for a given time period. If you have 3 website projects happening next week, and each project takes 78 hours to complete, let’s see which Role Categories can handle it, and which can’t:
Website Project X
| Role Category | Hours Per Project | Projects This Week | Planned Hours | Deliv Capacity Weekly (/52) |
| Design | 40 | 3 | 120 hrs | 129 hrs/wk |
| Development | 30 | 3 | 90 hrs | 77 hrs/wk |
| Strategy | 8 | 3 | 24 hrs | 52 hrs/wk |
| Total: 78 |
As you can see, with 3 projects planned for a given time period (in this case, an upcoming week) the development team is going to be short-staffed. The Design team should (in this model) have enough capacity to take on three projects that week. The strategy team could actually handle twice the amount of work.
Note: by working with Parakeeto, you’d gain access to planned work vs delivery capacity by Role Category reports just like this one:
Step 3: Identify the Gap
Now, for the easy part! Now that you have an idea of how to lay out all of these numbers, you can compare planned hours to your delivery capacity, and make decisions based on that. Any over-staffed areas may require adjustments, or a sales push to improve utilization. An under-staffed area may require a new hire or freelance resources to be brought in to weather the storm.
As noted above, the website design & development agency in our example can use these numbers at a high level to plan future hires and freelancing needs ahead of time. In this specific example, it might mean bringing in an outsourced development team, to help with that bottleneck.
Step 4: Implement and Monitor Capacity Plan
Finally, comes the ongoing part of this process. Capacity planning isn’t something you do once and you’re good. You’ll need to be continually monitoring these numbers, gathering inputs from multiple sources, and making decisions based on what the numbers are telling you (and even what your people are telling you!).
You’ll need to install a cadence where each team member can contribute their inputs to the system (usually through a well-deployed time tracking system) and ensure it’s being used properly (without time tracking compliance, this system is useless).
Bottom Up Capacity Planning
Let’s go through the step-by-step process, this time focusing bottom up, which is much more precise, ideally for a short time horizon.
Step 1: Analyze the Demand
First, you’ll want to start by getting an idea of what confirmed work you have in the pipeline. These projects will need to have a clear scope and timeline, otherwise this won’t be successful.
Break down the whole project into individual tasks, and assign hourly estimates to each one. You’ll also want to outline the deadline or time range for each task to be completed within.
This could look like the following for the onboarding phase of your project:
| Task | Hourly Estimate | Due Date | Team Member |
| Onboarding Email | 0.5 | 6/1/2023 | Emily |
| Setting the Schedule/Timeline | 0.5 | 6/2/2023 | Emily |
| Onboarding Call Prep | 1.0 | 6/2/2023 | Sasha |
| Onboarding Call | 1.5 | 6/4/2023 | Sasha |
| Onboarding Call follow up | 0.5 | 6/4/2023 | Emily |
| Handoff to Design | 0.5 | 6/5/2023 | Sasha |
A resource planning tool like Toggl Plan can help with lining out and assigning all of the tasks:
Step 2: Evaluate Existing Capacity
Next, you’ll then need to figure out how much of each team member’s time you have available to fill up with client work. A simply capacity calculation like we did in the Top-Down section will get you the answer you need:
Emily’s Capacity
| Total Capacity | Minus PTO (20 days) | Model Utiliz | Yearly Delivery Capacity Available | Weekly (/52) |
| 2,080 hrs | 1,920 hrs | 70% | 1344 hrs | 26 |
Weekly, Emily has 26 hours to put towards client work.
You can manage all of these metrics in a bottom up resource planning software (as seen in the example above) such as:
Step 3: Identify the Gaps
Next, you’ll identify the gaps. If you have the following for each project:
| Typical Website Project | Hours Needed |
| Emily’s Time | 5 |
| Sasha’s Time | 12 |
| Ben’s Time | 7 |
And you have the following capacity for each team member:
| Team Member | Total Capacity | Minus PTO (20 days) | Model Utiliz | Yearly Delivery Capacity Available | Weekly (/52) |
| Emily | 2,080 hrs | 1,920 hrs | 70% | 1344 hrs | 26 hrs |
| Sasha | 2,080 hrs | 1,920 hrs | 70% | 1344 hrs | 26 hrs |
| Ben | 1,040 hrs | 880 hrs | 50% | 440 hrs | 8.6 hrs |
After comparing each team member to the hours available each week, vs the hours you’ll need per project, you’ll start to notice some gaps. Here, we see what Emily and Sasha have 26 hours a week available for Delivery work. Emily only needs 5 hours per project, so theoretically speaking she could handle 5 projects per week.
Sasha on the other hand needs around 12 hours per project, only allowing him to handle 2 projects per week. Ben can handle about one per week. This might mean that you’ll need to hire more members to support roles that Sasha and Ben are doing, to ramp up the throughput. It also might mean you’ll need to restructure Emily’s role so that not so much of her time is being wasted by not being able to fill up her capacity each week.
This kind of technique can help us identify shorter-term risks and help avoid overworking the team. It will also help in finding opportunities to balance workloads with less utilized team members.
Step 4: Implement and Monitor
And of course, similar to the Top-Down approach, you’ll want to install a cadence where you can continually monitor your estimates, monitor time tracking compliance, and so on, so that you can rely on the data to help you make better decisions.
Importance and Benefits of Capacity Planning
Capacity planning of course has many benefits. Firstly, it helps companies avoid the classic resource problem—no more wasting time and money on too much stuff that’s just sitting around, or scrambling to keep up when things get busy. It’s like having a crystal ball to predict just how much you need.
Not only does it keep everything running smoothly, but it also keeps customers happy and satisfied. You know how frustrating it is to wait forever for a service or product? Well, with capacity planning, that’s ancient history! Businesses can keep their promises and deliver on time, every time.
Not to mention – the performance increase. It helps businesses manage costs and boost their profits by being super efficient with their resources.
Challenges in Capacity Planning and How to Overcome Them
You’re likely to encounter a few common challenges in your capacity planning journey.
Inaccurate Forecasts
The whole point of planning your capacity is to be able to rely on these reports. But, there are times that come where your report was wrong. You can start to troubleshoot your reports by revisiting your review cadence. Ask yourself:
- Have we been regularly revisiting our estimates based on how our projects continue to go?
- Is something like this built into our project retrospective cadence?
- Have we been regularly updating our existing capacity based on changes in team, role structure or other tweaks?
- How might this be impacting the numbers?
- How might this be impacting the numbers?
And once you identify areas that may have been slipping them, run your numbers again. If they’re still off – consider what the numbers are trying to tell you. If you’re consistently hearing that your team has too much work, that might be telling you that your estimates need to be tweaked, as projects are taking longer than anticipated. It might also indicate an issue with your workflow/process.
Rapid Growth
In an ideal world where your agency is scaling, you’re going to be consistently outgrowing your previous internal reporting systems. The same goes for your capacity planning process.
As the business grows and becomes more complex, the feasibility of super granular reports wanes. Tweak your capacity plan to focus not only on precision but more importantly on accuracy. If the reports aren’t correct, all of this work is for nothing. As you scale, it will become increasingly important to create adequate separation between bottom-up and top-down planning so that all the stakeholders in the business are enabled to plan ahead without being constrained by each other.
Conclusion
In conclusion, capacity planning is a crucial function that empowers businesses to look into the future and anticipate their team’s needs, enabling effective decision-making in staffing and timelines. By employing various strategies like top-down and bottom-up forecasting, businesses can gain valuable insights into their project management and resource allocation.
Implementing a robust capacity plan ensures that your project and operations teams thrive, resulting in improved efficiency, better customer satisfaction, and increased profitability. However, capacity planning does come with its challenges, such as inaccurate forecasts and the need to adapt to rapid growth. To overcome these challenges, regular review and adjustments in the planning process are essential.
In a dynamic and ever-changing business landscape, capacity planning serves as a vital tool, providing organizations with the foresight they need to optimize their resources, deliver projects on time, and stay ahead of the competition. Embracing this proactive approach to resource management can ultimately lead to sustainable success and growth in the long run. So, take the time to invest in capacity planning and watch your business reach new heights of efficiency and success.
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