Here’s a conversation we as business coaches have had numerous times over the years, and a scenario we’ve lived through ourselves:
Coach: “What does it feel like in your business at the moment?”
Business Owner: “We’re flat out! Everyone’s just about keeping their head above water.”
Coach: “What does flat out mean? How far above a sustainable work rate are you?”
Business Owner: “Not entirely sure. It would probably depend who you asked. We won a couple of new clients in the last quarter and we seem to have been running to catch up ever since.”
Coach: “So is everybody ‘flat out’, or particular teams?”
Business Owner: “It’s all hands to the pump. Everyone’s doing what it takes and helping out where they need to.”
Coach: “So what’s your strategy to get things back under control?”
Business Owner: “We need to recruit, ideally. I’m starting to pick up a few grumbles from the team. And clients can sense it as mistakes are slipping through. However, I’m a bit reluctant. A couple of our long-standing Clients are facing pressures of their own so I’d rather hang on and see how that pans out before committing to more staff.”
There are a number of themes here and likely to be several underlying causes for this state of affairs.
Let’s focus on one that is common to many small businesses with a high service ethos: insufficient capacity management. Or, to put it another way, a commitment to service their clients that overwhelms any systems they may (or may not) have in place to manage their capacity.
What Capacity Is and Why You Should Manage It
Firstly, what do we mean by capacity? We mean exactly the same as we do in everyday life. If we buy a one litre drinking bottle, we understand its capacity: 1 litre. Most of us have a rough idea of the capacity of our cars’ petrol tanks; measured either in litres or the £ equivalent. We also talk about our capacity to achieve something by a deadline: which tends to be a judgment based on the time we estimate the task will take (which will also depend on how good we are at it), in the light of all other tasks we have to perform and the total time we have available.
The capacity of a business is no different: it is a measure of the maximum output it can produce with the resources and infrastructure at its disposal – be that units of output, or the sales value of that output. Output can be products, services or a blend of the two.
Whilst the concept of capacity is straightforward, it’s relatively uncommon in our experience to find service businesses who know their capacity, and how this is built up across departments or teams. And even rarer still to find businesses that are systematically using capacity management to inform their business strategy.
The Results of Poor Capacity Management
The result is uncertainty, poor decision-making and sometimes, break-downs. Running a business without a capacity strategy is rather like driving a car without a dashboard.
If a business doesn’t know its capacity, it cannot know, other than by feel, how far above or below that capacity it is operating (aka its operating rate). Consequently, it won’t have a measure of how long it can continue at that rate before reason would suggest that someone or something is likely to break down – for example, through increased illness, systems failure or demotivation. If you drive a car flat out, you get fewer miles to the gallon and eventually, components wear out. People and systems are no different.
Capacity Modelling in Practice
A capacity management tool set enables a business to get on the front foot, and better manage its operations and the expectations of stakeholders for mutual benefit.
It starts with modelling the capacity of each resource type (or department) in the business. Take a typical service provider, such as a marketing agency. Once we know for each revenue-earning resource (Account Managers, Creative Directors…) what the sales value is of their maximum output (number of chargeable days per annum x charge out rate), we can compute what constitutes a sustainable operating rate and its corresponding value.
Adjust this across the year for holidays and training days, for example, and we know what we have to sell that we can reasonably sustain each month (thereby ensuring we deliver the quality and creativity over time that clients expect).
Now let’s turn our attention to selling that inventory. A well-managed business should be evaluating every piece of new business for the capacity, by type of resource, that it will need to commit to it.
This estimation process should assess when that capacity is expected to be required and, in view of all other commitments made to date, whether it will be available at that time. If it won’t, then the business can begin to align expectations from a very early point with the new Client, who will welcome the proactive stance of their new agency. If it will, it can alert teams to the prospect of new and exciting work on the horizon.
This creates a further possibility: incentivising clients to use capacity at different times, perhaps by pulling forward a brief, to even out competing client pressures, seasonality or cash flows.
Note that during the selling process, the business can also choose to insert into its estimate a sales value premium for exceptional creativity, or the stand-alone value of its ideas for example.
As a new contract comes on stream, our capacity-conscious business can then monitor in real-time the capacity it is investing versus the capacity the business committed to. This sets up a learning and feedback loop both for the ongoing management of the client account, to ensure margins are maintained, and for future sales estimation in the new business process.
Capacity Management in Service Businesses
In service businesses, this can be achieved through the use of widely-available, typically cloud-based time measurement tools, some of which allow you to enter a benchmark (the sales estimate of capacity required) against which to measure time invested by individuals on different clients’ jobs. This often meets resistance from staff who bemoan the administration involved, perhaps for want of having the bigger picture and how that will benefit them, properly explained
An awareness of capacity and sustainable operating rates will enable a business to monitor the fuel (or energy) gauge in every department, every week. This is because it will understand at what level each is operating versus its capacity, how quickly the energy is being depleted and when the warning light is likely to come on.
The business will know in advance when a particular team is going to be under sustained pressure, which will mean that they can plan for this and either engage more resource, for example, or give the team time to engage the support of family, child-care etc. to ease the burden for everyone’s benefit.
Relationships with staff and their wider supporters become more respectful and sustainable for everyone. Satisfaction increases. Productivity goes up. Churn decreases. The effort of maintaining a timesheet seems worth it, after all.
Benefits of Capacity Management
Across the business as a whole, leadership can ensure that capacity is balanced between departments, and investments are prioritised to maintain that balance as the business grows.
In the longer-term, the business can better predict its needs and plan its finances to allow for major decisions that affect capacity, for example, moves to new premises allowing the employment of more staff, or investments in new equipment and technology.
Capacity strategy is similar to changing gear in a car. When we learn to drive, we soon discover that if you set off in first gear and try to keep accelerating, eventually the car reaches a ceiling and won’t go any faster. The engine does not have the capacity to increase output further. To continue on our way, we need to change gear.
Select second gear, and suddenly the same speed feels much more sustainable, and when we press the accelerator, the engine now has the additional capacity it needs to respond. Output increases until, eventually, we reach a ceiling once again and need to change into third gear.
If we know our capacity and present operating rate at any given point, we can anticipate when we will need to change gear in order to acquire more capacity and enable the business to continue smoothly on its journey of growth. Without this foresight, progress will likely feel more stop-start, the overall costs of the journey will increase, and it will likely take longer to reach our goals.
As electric cars have come onto the market, it was interesting to note one of the biggest barriers to purchase: range anxiety. The majority of drivers needed to be convinced that electric cars’ batteries have the capacity they need for their daily lives, and worried about the disruption this would otherwise cause.
Businesses and the people who work in them are no different. Many continue to live with range anxiety every day: otherwise experienced as being ‘flat out’ and unsure how long they can keep going before they run out of juice.
It needn’t be this way. Capacity is a tool-set that keeps on giving, and once up and running, you will wonder how you ever lived without it.
Would you like to find out more about creating sustainable growth for your business, with the help of a business coach? Book an introductory call below, contact us online or call 0345 222 5618 to start the conversation.