When I was asked to write this blog the question that came to mind was: how many businesses really understand what capacity is? Most leaders know they have a problem; projects are not getting completed on time, clients are suffering because of delays or inefficiencies, but they don’t understand where the real issue is. Established companies with a solid COO on staff are more likely to understand capacity, but still may not evaluate it properly. When planning for capacity, you are looking for ways to expand the ability to do more work and create scalability. Most think that they should hire a new person to add capacity to the process. This seems like a simple solution. When demand for your product rises, you hire another person to increase the output. However, in today’s service oriented and high technology world, more bodies is not necessarily the answer. It increases your operating expenses and reduces the efficiency of your business. My goal here is to give you a few resources to help you answer the question: do I have a people problem or a process problem?
One very important factor in this evaluation is to determine the effect that hiring another person has on the bottom line. We started with The Labor Efficiency ratio, defined by Greg Crabtree, author of Seeing Beyond Numbers. Greg teaches you how to look at your numbers from a different perspective. He helps you get beyond standard accounting to really see the effect labor has on your profitability. Traditionally, companies used economic theory to make hiring decisions by following the model of supply and demand. You would increase your staff based on the demand of your product or service. However, this has an impact on your profitability because you may not receive an equal increase in revenues for each person you add. Additionally, this methodology results in inefficiency because when demand wanes, your company ends up overstaffed. You are left with a decision to reduce your workforce or bleed out profits in labor costs. Because of the fear of workforce reduction in this scenario, staff tend to create “busy” work in order to protect their jobs, leading to inefficiencies and needless bureaucracy. When demand rises once again, this bureaucracy compounds the inefficiencies and further reduces the output. Staff are not willing to focus on larger picture goals because they have filled their time focusing on that “busy” work. You find yourself back in the same situation again and again.
What is important to understand is capacity planning goes beyond hiring another person. You need to have a plan in place that takes into account the economic impact, explains what position you’re hiring for, and how a new person fits into your organization. The biggest step forward for our company came when we learned how to evaluate our labor efficiency ratio. Understanding the impact of hiring on our profitability gave us incentive to solve capacity problems differently.
Early on in my career, I went into our CEO’s office and suggested that we hire someone because I believed our team was at capacity.
“Are you sure? Is this a people problem or a process problem?” He responded. “Don’t throw people at a process problem.”
At first I questioned what he meant. Clearly every team member is busy, so we must be at capacity! What I didn’t understand at the time was the difference between following an existing system under the assumption that it was the best way to accomplish the desired outcome and reevaluating the process to look for inefficiency. I learned from that experience. I had to reevaluate how much work is in a process in order to see how much waste there is. At first, I thought of waste in the physical form, but Paul Akers 2 Second Lean talks about 8 different types of waste in EVERY process. Paul runs a manufacturing business in Washington state. He began a journey to improve how his company accomplished goals and learned how to apply these same principles to every aspect of his life. For me, identifying the waste and learning to create simple solutions to reduce it has improved many processes, in our business and in my personal life. Our office in Hagerstown uses this book to create a culture where each person is looking for simple improvements in their daily routines to create efficiency and scale. This has led to greater productivity for both of our offices in Hagerstown, MD and Johnson City, TN. It has also helped us in our hiring decisions. I can now evaluate when a team member is truly at capacity and when they are dealing with inefficiencies that keep them from completing a desired result.
It is also key to understand that capacity is not static, even in the same position. For instance, imagine you have two people on your team: employee A and employee B. Employee A may be incredibly proficient in Microsoft tools, therefore creating a spreadsheet might take them 15 minutes. Employee B is not as proficient in Microsoft tools, therefore creating the same spreadsheet might take them 30 minutes. How do you quantify those tasks in order to understand the difference in capacity or productivity between employee A and employee B? I am sure you can immediately see how this information would be incredibly valuable. You could not only manage your team’s efficiency for maximum productivity, but easily identify strengths and weaknesses of each individual employee. Your personnel evaluations would become far easier and increasingly effective. You remove any subjective biases from the conversation and can coach from a fact-based perspective. You can recommend training and practices to improve on the skill level of your employees. Your compensation system could be based on achievements that are truly quantifiable. Now that is planning at its finest!
ALOE, a tool developed by Bigfork Technology, was created to take advantage of workflows, communication, collaboration, and automation to make your team more efficient. This tool also allows you to assign a skill level to each employee, and based on that skill level, it will tell you how many work units that employee can accomplish in a certain time period. If you can quantify what the workflow is, based on your skillset, you can know exactly how much capacity an employee does or does not have, and you can easily run reports to understand when an employee is overwhelmed in order to shift some work to another team member. Additionally, if an employee is underwhelmed and you are not utilizing their capacity to its fullest, you can look to their skill set and get them involved in different initiatives to keep them engaged. Using a tool like Aloe will help you understand what your workflow looks like.
So, let’s get to the important part. How do you get started with capacity planning after learning all of these helpful tips? The first step is creating a functions list or an accountability chart. Identify all of the functions in your company, and then identify who is performing each function. Next, review your profit and loss and run your labor efficiency ratio. What gets measured gets managed so learn to look at this ratio and understand the effect the next hire will have on your bottom line. Realize that in smaller companies, you’re going to have someone who handles multiple functions for you. Your next step is to evaluate where this employee excels and identify where they may be weak or lack the desire to fulfill the function. This will help you decide when to bring the next team member in and what position to hire for next. You will make better hiring decisions and be able to present a clear career path for your new hire. Then, you take the accountability chart and use it with a tool like ALOE You will have information to help you understand where capacity is currently, when you need to look to hire, when you need to increase someone’s skill, or reduce inefficiencies in an existing process.
