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Hannah Taylor

What is Capacity Utilization: Understanding Your Company's Potential

Sustainable profitability, unlocked. Understand how time and effort is being spent in your organization by measuring and managing capacity utilization.

Did you know the average worker is productive for less than three hours daily? Considering that the typical American work week totals 40 hours, a ton of productivity is being lost.

Any good business understands that while employees need downtime, their productivity is tied to business success. To better understand your organization's potential output (and your workforce's potential for productive work), you need to track capacity utilization.

In this article, we're discussing this handy metric, how to measure it, and some ideas about improving it.

What is capacity utilization?

By definition, a capacity utilization rate measures the time the organization's employees spend on productive work. Also known as resource utilization, this information can inform capacity planning, which aims to plan a business’s resources around predicted demand strategically.

An individual’s capacity utilization rate is measured as a percentage and refers to the time they can realistically be productive in a day.

After all, people can’t be productive 100% of the time — nor should they be expected to be — and capacity utilization rate seeks to measure how much of that potential productive time is being utilized.

Runn makes it easy to tack capacity utilization. Create a free account to give our People Planner a spin.

Why measure your capacity utilization rate 

Let’s dive into why measuring your capacity utilization rate is so important.

Project planning

Corporate capacity utilization rates help identify if you have the capacity to take on new projects. If your utilization rate is high, you're making good use of your capacity, whereas low capacity utilization suggests room to take on new projects.

Cost management and profitability

When you understand your business capacity - or your workforce’s potential for productivity - you can put measures in place to ensure you reach these goals. By improving workflows, identifying inefficiencies, and reducing waste, you can optimize resource utilization and increase revenue potential.

Resource allocation

Capacity utilization rate is a helpful metric for informing effective resource allocation, as it helps you measure your business’s capacity for output against predicted demand. The process of matching your resources to upcoming business is known as capacity management.

Hiring decisions

While low capacity utilization rates suggest room to take on more work, a too-high capacity utilization rate indicates that your business's output is larger than its capacity. This might mean it's time to consider upskilling your teams and making new hires.

A happy workforce

When you understand your organization's capacity utilization rate, you can make decisions that ensure they’re not overstretched or understimulated.

Long story short, future-focused businesses understand that capacity utilization rate is an indicator of not only its capacity for output but also the health of the organization and the well-being of its employees. 

What is the optimal capacity utilization rate?

Capacity utilization rates aren’t an exact science, but they’re invaluable in helping resource managers understand whether they’re getting maximum value from their human resources.

The optimal utilization rate is hard to pinpoint because it will differ by industry, type of work, seasonality, and individual. After all, what one person can accomplish in three hours may vary greatly from that of their deskmate.

But if we had to put a number on it, research suggests that the optimal capacity utilization rate falls around 80%. This meets the need for high productivity while allowing room for downtime, admin, and fluctuations in demand.

But did you know that underutilizing or overutilizing people can negatively affect them and their employers?

Further reading: The Problem with 100% Capacity Utilization

Effects of underutilization and overutilization

So, what happens to businesses that fail to utilize their resources effectively, leading to too high or too low capacity utilization? Let’s take a look.

The impacts of underutilization

The effects of underutilization, which may point towards low capacity utilization, include:

  • Wasted resources. When there’s not enough work to go around, you’re spending money on roles that aren’t being utilized.
  • Reduced productivity. Measuring your capacity utilization rate helps you understand your business’s potential for productivity; when there’s a lack of work, your overall business productivity will drop as people fail to meet their utilization targets.
  • Low employee morale. Boreout is as much of a concern for business leaders as burnout. While a slow day or two can give employees a welcome reprieve from the busyness of work, when they’re frequently underutilized, they’ll likely become bored or feel they’re not contributing to the company, leading to poor morale.
  • Low ROI. The ROI on paying full-time wages for only 40% productivity isn’t great. Underutilized resources are an unnecessary expense for businesses, costing your business money without being productive enough to contribute to profit.
  • Signal a mismatch between skills available and skills needed. If you see employees in one area of the business regularly underutilized and those in another department overutilized, this signals a mismatch between the skills available in the organization and the skills needed to meet demand.

The impacts of overutilization

As for the dangers of overutilization, they are many of them:

  • Stress caused by increased workload. Employees may experience high anxiety and stress levels created by an excessive workload. If they're constantly overworked, they will eventually suffer from mental and physical exhaustion.
  • Decreased employee engagement. Over time, poor workload management and a demanding schedule can make employees feel like their work isn’t valuable. Employees who feel dissatisfied with their work or unvalued may become less productive or even resort to quiet quitting.
  • Reduced productivity. Overworked employees may lack the motivation to complete their tasks effectively, leading to lower productivity levels.
  • Poor quality work. More work doesn’t necessarily mean better quality work. If employees are pushing themselves to meet capacity utilization quotas, the quality of their work may suffer.
  • Reduced profitability. This increased pressure to be productive can also cause people to make mistakes and miss deadlines, disrupting workflows. This can reduce profitability, tank customer satisfaction, and ruin the company’s industry reputation.
  • High turnover. Employees may seek jobs with more sustainable practices and healthy work-life balances that meet their needs. In the end, high turnover means constantly needing to replace talent, which lowers the high utilization productivity-driven businesses are trying to cultivate.

How to measure your capacity utilization rate

Now you understand the concept of capacity utilization and why this metric is so important, how do you actually measure your capacity utilization rate? Let’s break it down into several easy-to-follow steps.

Understand what data to collect when measuring capacity utilization

The first step in measuring this metric is defining the data to be collected. This is the formula for calculating capacity utilization: Capacity utilization = (actual productive hours/ total available capacity) x 100

But to complete this equation, you’ll need these two data points to hand: 

  • Total available capacity — or the total hours available to be used
  • Actual productive hours — or the hours forecasted to be used productively

These data points represent the values you want to use in your report.

Set capacity utilization goals

First, set utilization goals across the organization. Your organization’s utilization goal represents the maximum hours available to be used productively.

These may differ from department to department or by role, but you should have an average across your organization.

As we covered earlier, this should be around 80% of the working day, allowing for good productivity while considering that people need unscheduled time.

So, if your company’s work day is 8 hours long and you have a utilization goal of 80%, its total available capacity utilization can be worked out like this:

(8/100) x 80 = 6.4

That means your total available capacity per day is 6.4 hours. Remember, you can scale this up by week or year to look at the company’s capacity utilization at a larger scale.

Define what counts as ‘productive’ hours worked

Now, it’s time to define how you’ll measure your workforce’s productivity. What’s important to note is that you measure capacity utilization in two ways:

  1. Historically. Understanding your business's historical capacity utilization rates includes looking at past performance, allowing you to make optimizations moving forward.
  2. Forecasted. This compares the work your organization has planned for the coming weeks or months to your available time.

We’re going to focus on the latter method for now. The easiest way to do this is by digitally tracking upcoming utilization — more on that in a moment — but you can’t do this if you don’t understand the difference between productive and non-productive work. Here's how professional service firms and agencies typically differentiate between the two.

Productive time

Productive time refers to time spent on client billable tasks that directly generate revenue, such as:

  • Project work
  • Client meetings
  • Preparation and planning
  • Project management
  • Client support

Non-productive time

Non-productive time typically refers to any tasks that don’t generate revenue, such as:

  • Administration
  • Internal meetings
  • Business development
  • Personal time, downtime, and idle time
  • Professional development
  • Travel

Remember, when measuring capacity utilization, you'll usually exclude admin and operational staff whose productivity isn’t directly related to driving revenue through billable hours.

Collect your utilization data

Your utilization data doesn’t appear in a spreadsheet by itself, so you’ll need to put systems in place to collect it.

If you want to understand how much of your organization’s time is forecasted for productive work moving forward, you need a robust resource management platform — like Runn — to plan upcoming projects that will contribute to your business’s productivity. 

The combined power of project planning and resource scheduling will allow you to plan your resources months in advance, giving managers an overview of projects in the pipeline and which teams and individuals are assigned to them.

Calculate future capacity with capacity utilization reporting

Now comes the good part: calculating your capacity utilization!

A capacity report uncovers your ability to take on new work by comparing your capacity to your confirmed and tentative workload. This is valuable for long-term capacity planning as it can reveal over or underutilized resources and answer questions about bandwidth to take on new projects, forecasted demand, and hiring needs.

How to manage capacity utilization reporting in Runn

And good news — with Runn, you can automate capacity utilization reporting. Here’s how.

  1. Set your reporting period. This could be the current week, next month, or the coming year.
  2. Select which groups you want to include in the report. Our handy group reporting features are helpful when calculating capacity utilization across the entire company or by specific groups, such as teams, departments, or even job roles. 
  3. Set your filters. The example below filters the report by Role, with Developers selected.
  4. Review your data. This chart uncovers the capacity utilization of the business's developers by showing their capacity versus the confirmed workload.
  5. Dig deeper! If you notice a problem, such as a specific role being overcapacity in a given month, you can click on individual resources to explore which projects are causing the overutilization.

Curious about exactly how these capacity and utilization reports can be used? They can show you:

  • Confirmed workload. This is the sum of all hours in a given period that have been assigned to a confirmed project.
  • Tentative workload. This is the sum of assigned hours associated with tentative projects that may or may not go ahead.
  • Maximum capacity. As mentioned, this is the sum of everyone’s potential working hours — or our ‘Total available capacity.’
  • Remaining capacity. This shows how many hours are currently not utilized in a given period, meaning they are available to be allocated to a project.
  • Utilization. Which individuals, groups, or skills are being under or over-used? This will reveal if you have too high or too low capacity utilization.

Continue monitoring

You’ll need to run these reports regularly to understand if you have a high or low capacity utilization rate, allowing you to uncover your capacity to take on new projects or where you’re at risk of overutilizing your staff and tanking productivity.

group capacity utilization
Get group utilization data by Roles, Team, Skills, Employment Type, etc.

Strategies for improving capacity utilization

Have you identified that your capacity utilization is too low or too high? Here are some helpful best practices to help you fix it!

You can’t manage what you don’t measure

If you’ve noticed your business’s revenue slowing or employee engagement is uncomfortably low, you have identified a problem with capacity utilization!

But what are you meant to do about it if you don’t understand where the problem lies? After all, you can’t manage what you can’t measure.

The first step to improving capacity utilization is to measure it accurately. One way you can do this is by…

Looking at historical data (hello, time tracking)

If your goal is achieving optimal capacity utilization, you need to understand where your problems lie. This means reviewing your historical utilization data.

The simplest way to track how employees use their time is with electronic timesheets directly connected to your resource plans. This data can then be pulled into reports, including capacity utilization reports, allowing you to understand:

  • Which areas of the business have historically been underutilized, suggesting opportunities to downsize or take on more work
  • Which teams are frequently overutilized, allowing you to hire new team members to support increased capacity

Make use of technology to optimize capacity utilization rate

Thankfully, tools like Runn make reporting on and understanding capacity utilization rates easy. Some benefits clever resource managing platforms offer include:

  • Automatically collecting up-to-date capacity utilization data via timesheets
  • Project planning and resource scheduling in one place
  • A huge range of handy reports
  • Resource capacity planning features

Book a demo with Runn today, or give our features a try for free ➡️

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