How’s that capacity plan going? By David Smith on May 6, 2022
As many readers may be aware, I have long advocated that every firm needs a production manager. Part of that job is to ensure that the business has sufficient capacity to get the work done and develop new work. In these resource constrained times, this is no easy challenge. While, before COVID, there were still significant challenges in finding quality labour, as things have opened up more recently, the labour shortage has become acute. Many recruiters are reporting that this has been the toughest market in living memory.
The critical shortage is then leading to direct targeting of people on LinkedIn increasing significantly the risk of losing team members.
So, in a world with constrained resources, it is critical that longer term planning occurs to ensure that the firm has its resource settings right. Allowances need to be made for the potential for increased churn where experience and client knowledge is lost which directly impacts the productivity and effectiveness of income team members.
As firms are framing their budgets for 22/23, a capacity plan needs to be a critical component of the plan.
A capacity plan is quite a simple concept:
Part 1 is to perform a “bottom up” calculation
- What productivity should you expect from each team member (hours charged to clients)?
Part of this calculation considers the hours available. I have tended to use 1,650 hours (52 weeks, less 2 weeks leave, less 2 weeks public holidays, less 2 weeks other leave) – 44 weeks * 7.5 hours per day.
More recently, some firms are reducing available hours by a further week (and sometimes more) to allow for lost time relating to COVID isolation.
Some have also found that productivity is being lost by senior staff needing to spend additional time training new recruits as they have experienced increased churn of team members in their firm.
- What is the appropriate charge rate for that team member? As we see inflation starting to bite, do we need to start planning for rate increases. Some readers, who were working in the 1980s, would recall periods when quarterly rate increases were contemplated.
- What level of write-off/on should be planned. As a minimum an improvement on last year’s performance should be planned.
If you then multiply the hours in 1 with the rates in 2 and add or subtract the write-off/on you should end up with your productive capacity.
Part 2 is to perform a “top down” calculation to estimate what you will bill clients
- What is your expected fees from each client after allowing for price increases
- What is a fair target for unknown special work
By then subtracting Part 2 from Part 1 you can determine your level of excess capacity or capacity shortfall.
Clearly, the calculation is not 100% accurate as it doesn’t take into account capacity shortages or surpluses for people at different levels in the firm or at different times during the year but it gives some approximation of the situation.
A more accurate assessment can only occur by undertaking a detailed resource plan where time/team member and month is budgeted by client. It’s a big job to set this up but many have reported that it is one of the most effective ways to plan workflow and improve efficiency and client service.
Clearly, if there is a capacity shortfall action is needed:
- Find more labour (easier said than done). See our article from last year “Where have all the people gone?”
- Plan for overtime (some have needed to resort to this, this year). Clearly not ideal when team members are likely being targeted by others.
- Review processes and technology to unlock efficiency improvements. Every firm should have a plan to continuously review all of their processes to see if there is a better way for things to be done, taking new technologies into account. Contemplate what can be eliminated from processes.
- Ramp up your training to assist in ensuring people are optimising their effectiveness.
- Ponder a client cull. If resources are heavily constrained, now is not the time to spend time and energy on clients who don’t pay their bills on time or are difficult to deal with. As a minimum put the price up – whether they leave or if they accept the new price you’re better off.
The question also needs to be asked – what is the ideal situation regarding capacity? We have long advocated that a firm should be striving for 20% free capacity. This allows for the unexpected but also gives people the confidence to market and undertake business development activities to grow their business. Almost every practitioner will acknowledge that there are untapped needs in their client base. Due to resource constraints, they fall into the compliance vortex and don’t end up with sufficient time to engage with clients to unlock these opportunities.
So as you contemplate your 22/23 budget, get started with the capacity plan. It should be the first document prepared.
David Smith conducts firm reviews and facilitates the development of strategic plans and business plans. Contact David at [email protected] to explore how he may be able to help your firm.