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Capacity? What capacity? By David Smith from Smithink on May 7, 2016

Capacity What capacity

In many firms the challenge continues to attract and retain star performers. Many are struggling to have sufficient capacity to complete their known work in the pipeline, let alone have sufficient free resources to develop and deliver new services.

Attitudes don’t help either. I was in a firm recently where the partners were quite proud that they had effectively matched their available labour to the work in their pipeline. Their free capacity was less than 3%. While this may maximise short term profits, how will this firm ever grow?

Labour cost is far and away the biggest cost in any professional service firm, yet few firms have effective resource and capacity plans. When I ask firm leaders what free capacity they have in their firm few can give a confident answer based on their capacity planning. For many it is more an educated guesstimate. Even fewer are able to confidently answer where in the firm (level) or at what time of the year the free capacity exists as they lack a detailed resource plan. This lack of accurate information means that the firm is unable to make the best decisions about its labour. When do we need to add additional resources and at what level? When should we be asking staff to take holidays? How much time do we have available to develop new services or undertake marketing? When should these activities occur to not interfere with our day to day client service? When is the best time to conduct training?

There are two elements to effective labour planning.

The capacity plan:

An effective capacity plan requires two calculations. The first, termed “bottom up”, looks at the number of productive hours that team members should generate each month multiplied by estimated charge rates. The second, termed “top down” estimates the fees that will be generated from each client plus an additional amount for estimated special work from existing clients.

The difference between the two numbers is the firm’s free capacity. A low free capacity will certainly maximise profits in the short term but will restrict a firm’s capacity to grow. Low free capacity will almost guarantee that work will need to be done by people who are too senior or too junior for the job resulting in inefficient use of labour and lowered profitability. Firms with a desire to grow need to create the free capacity. Progressive growth firms ensure that they have a minimum 20% free capacity to ensure that they can effectively service new clients and to have time to develop new services and conduct marketing activities.

The resource plan:

While many firms undertake capacity planning, few have detailed resource plans as significantly more work is required. It also involves changes in how clients are engaged. It is only accounting firms that have a business suited to resource planning since much of the work is repeated year on year and so therefore can be planned. Most other professional service firms have a lower proportion of their work repeat year on year.

An effective resource plan requires the hours required for each client group’s annual work to be estimated. It is plotted into a month that the work will be done and matched to the team member most suited to undertake the work. In this way it is possible to see team members who have too little or too much work in a given month. Adjustments can then be made to smooth out issues.

Clients need to be engaged so that they will agree the month their work will be done. Many clients are flexible, some are not. Plan the inflexible clients (bank needs reports etc) first and use the rest as fillers. The advantage to the client is that they know when the work will be done and the turnaround time in the firm is substantially reduced as work is not sitting in the corner waiting to get started.

Firms that have implemented resource plans have all seen the significant benefits. It’s not easy to do, but the benefits in team morale and client satisfaction should not be underestimated. Reduced write-offs from better work allocation and overall efficiency from smoothing work throughout the year add to profitability.

So now with the new financial year just around the corner, take some time to consider developing your own capacity and resource plans to position your firm to make best use of your valuable (but expensive) labour.

Capacity & Resource planning is just one topic at our Business Advisory Conference being held on May 30-31. Click here to find our more or to register.

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