Resource capacity vs. demand: mastering the six forces

People are the most valuable asset your company has. Without them, you wouldn’t be able to deliver projects and generate revenue. People are also the most expensive cost your company has. Fail to keep them busy, and they soon eat away at profits. You need enough people to capitalize on your opportunities, but without risking too many of those people being sat on the bench. This conflict between too few and too many, between hiring and firing, is one of the most significant and persistent problems in running a successful professional services company.

To maintain profitability and delivery quality, you must solve the resource capacity vs. demand equation. In this guide, we are going to help you balance the equation, enabling you to make people decisions with confidence, and ultimately improve the profitability of your company.

Ultimately, your earning capacity is determined by the number of people you have. That’s great news! Let’s hire more people.

But, wait a minute—people are also your biggest expense. And if they’re sitting on the bench with no fee earning work to keep them busy, they can quickly drain the profitability of your company. That’s bad news! Cancel those hirings.

Of course, you can’t blindly hire people to increase capacity any more than you can impulsively get rid of people to reduce costs. It’s incredibly challenging to make confident decisions when it comes to people. The question persists: “Do we have too many or too few people?”.

People underutilization can rapidly evaporate profits. While you may be bringing money in by winning and delivering projects, the cost of underutilized headcount can dwarf any profits you stood to earn and leave you with an unprofitable company.

On the flip side, when people demand exceeds supply, you can’t capitalize on your opportunities as you’ll be unable to deliver them… without compromising on delivery quality and staff morale, at least. If your goal is to grow your company, you’re driving with the handbrake on.

There are so many constantly changing factors when it comes to the resource capacity vs. demand equation, and the complexity of managing these factors increases exponentially with scale. When there are five of you in a room, you can balance the equation based on your gut feeling. When there are ten, it becomes harder. When there are twenty, it’s really hard. When there are fifty, it’s almost impossible, unless you have a proven way of handling it.

The proven way to handle the supply vs. demand equation is to continually manage the six interrelated and constantly changing forces. Once you master these forces, your staffing level will match your workload, and your company will maximize profitability as it scales.

The six forces are:

  1. Live projects
  2. Pipeline projects
  3. Internal resources
  4. External resources
  5. Roles & skills
  6. Peaks & troughs

Force #1: Live projects

It’s vital that you have a handle on the demand you’ve got for the work that you’re committed to right now.

The problem is that live projects, and the related demand, change all the time. Say you agree to a deadline but the client delays the project, pushing the timeline out further than you’d planned... suddenly your perfect plans are in disarray, people are going to be twiddling their thumbs (quick, fire them!) and a few weeks later extraordinarily busy (quick, hire them again!)as the unforeseen bottleneck approaches. This is a fact of life in professional services.

You must constantly keep your finger on the pulse in terms of the demand for resources on live projects. You don’t want to overwhelm your starting line-up with too much work, and you don’t want to have people sitting on the bench getting paid expensive salaries with no fee earning work to keep them busy.

The way to manage staffing levels on live projects is to have highly structured weekly resourcing meetings that are focused on evaluating staffing needs for live projects.

The primary goal of the weekly resourcing meeting is to resolve issues. These normally take the shape of overallocations (when demand for particular individuals is too high and a decision needs to be made about which projects they’ll remain on/be removed from), and under allocations (when there’s little or no demand for particular individuals). This effort gives you a higher-level understanding of the roles that are required, when they’re required, and how long for. In other words, the weekly resourcing meeting provides you with a vivid forecast of your current demand.

Force #2: Pipeline projects

In addition to your live projects, you also need to factor in your pipeline. The very nature of a project is that it has an end, and therefore new projects continually need to be identified and won… contributing to your view of demand for future live projects.

You need to know when your pipeline projects are scheduled to start, how long they’ll run for, their scale in terms of demand on your roles, as well as how likely they are to become actual projects (not every opportunity will be won, of course).

For instance, if you have a strong opportunity in your pipeline with a 90% chance of turning into a live project, you will want to weight that project higher in your equation than an equivalent project that’s down at an unlikely 10% chance of being won.

It’s recommended that a weighted pipeline view is also looked at during the weekly resourcing meetings, so everyone is aware of the direction of travel in terms of demand. You likely won’t win every project. You also likely won’t lose every project. The reality is somewhere in the middle. If you score your opportunities by the likelihood of winning them, using percentages as the metric, this enables you to create a weighted view. The fact is, if you win projects at the rate you think you’re going to win them, the sum of the weighted pipeline will give you the most accurate view that’s possible.

Force #3: Internal resources

Your internal resources are your go-to people, but there are three evolving factors that you need to consider:

1. Future new starters. You need to factor future hires into your resource planning, otherwise you’re not getting the true picture of supply and you unsettle the supply vs. demand equation

2. Future leavers / unavailable time. Staff turnover and time off are inevitable, so factor these events into your resource planning. You don’t want to be allocating people to projects that have their out of office on or, worse still, have left the business

3. Billable utilization. Let’s say a full-time employee is contracted for 40 hours per week. It’s highly unlikely that any full-time employee works 40 hours solely on billable work. Make sure that in addition to billable client work, you factor in things such as admin, training, internal meetings, etc.

Force #4: External resources

In addition to your internal staff, you have the option of leveraging external resources. However contractors can be a lot more expensive than employees, and this impacts profits.

Recognize, though, that you’re paying for flexibility. Unlike permanent employees, you only have to pay contractors when they’re working.

We’ve found that what typically works best for companies is having both a core team of efficient permanent employees and a pool of external resources that can be called upon as necessary.

Contractors can help your company through times when internal staffing takes a dip, such as holidays, training periods and high-volume workloads. Keep a database of contact info for your external resources. In this database, also note the resources’ skills and experience so you turn to the right people at the right time.

Force #5: Roles & skills

Not all supply and demand is equal. In any professional services company, you have different roles and seniority levels. Also, most companies have multiple service lines, which require different skill sets.

Top-level, it may look like supply and demand balance. But digging a little deeper, if demand is for a supply of roles and/or skills that either don’t exist or are unavailable, you have a problem.

Conduct a regular internal audit of your internal staff’s skills. Get clear about what skills your employees have or need. Audits like these are particularly helpful if you’re doing personal development plans as a part of your talent management strategy.

If there’s a particular niche skill that’s only required from time to time, chances are you don’t want to make a permanent hire; that employee would likely either sit on the bench for large periods or perhaps become unhappy with the types of projects they’ll be expected to work on to keep them busy. Still, when a need for that skill arises, you can consult your database of external resources and use a contractor to help you out.

Force #6: Peaks & troughs

Your company will inevitably go through peaks and troughs.

One month, you may have a project lull and multiple people on the bench, eating away at profits. The next month, you may have so many projects that your people are all overallocated just to get the work done. In both cases, your supply and demand balance is unsettled. Fortunately, there are things you can do to smooth out the quiet and busy periods.

If your peaks and troughs occur at the same time every year, you suffer from seasonality/cyclicality, and you have to control supply. You may do this by adopting a time off policy that encourages employees to use their leave during off-peak periods. If you’re in a peak period, remember a lull will follow, avoid bringing in more staff, and instead reach out to your external resources.

When you know a trough is coming, incentivize clients to accelerate their plans e.g. in exchange for a discount. That way, you’re keeping people busy on billable work and while you may lose a bit of revenue, it often beats having an expensive and underutilized team.

There you have it

We’ve presented the six forces professional services companies need to manage in order to balance the resource capacity vs. demand equation:

  1. Live projects - Run a weekly resourcing meeting focused on staying on top of the existing staffing demand of live projects
  2. Pipeline projects - Produce a forecast of demand based on a weighted pipeline
  3. Internal resources - On a monthly basis, reassess internal capacity based on a checklist of three points: new starters, leavers / unavailable time, and billable utilization
  4. External resources - Maintain a database of external resources you can leverage when the time is right to use contractors rather than hire
  5. Roles & skills - Conduct an internal skills audit on a quarterly basis to ensure you know the true landscape of your supply
  6. Peaks & troughs - Smooth out the peaks and troughs of demand by phasing time off, leveraging external resources to tackle short-lived peaks, and incentivizing clients to accelerate plans to plug troughs

Start managing your company’s forecasting and hiring with these forces in mind, and you’ll see a significant uptick in your profit margins.