Managing a firm’s capacity is key to sustainability
Capacity is a limited resource, yet firms act like this limitation doesn’t exist. Being aware of this limitation can greatly affect a firm’s success in growth. Many growth problems in firms are rooted in capacity that is overtaxed. Simply stated, there is too much revenue seeking service in most firms. Trying to serve too much revenue when you don’t have the capacity to deliver those services in valuable ways leads to stressed out owners, overworked teams, and unhappy clients.
Capacity is simply the hours your firm (all the team) can give to the work your firm is asked to produce (from all clients). If you were to track this, you would add up all the hours your team has available to give, categorize those hours into various levels of valuable output, and then compare it to all the work for clients your firm is asked to produce. It’s a simple calculation, but it would truly take a lot within your processes to track all of this. It’s simple, yet complex. That is the definition of what I mean by the term capacity.
You have to be aware of this capacity in vs. capacity out relationship. Firms overlook the importance of this firm-management engine. Those who only take in work that they can produce in extreme quality get to ask for the highest prices from clients. Overselling the capacity of a firm can actually inhibit being able to charge what you are worth.
Because capacity management is a key to firm sustainability, firm growth can often be more profitably achieved through client substitution, rather than client addition. Because of the reality of the limitation of firm capacity, firms can grow by replacing low-profit producing clients with high-profit producing clients. This is not a denigration of the client, but rather a realization of the firm’s inherent limitation that high service must be coupled with high-profit producing clients. Instead of adding a bunch of random clients, firm leaders are often assessing “swapping” one client for another. Making this swap is a key leadership move of firm owners that are seeking to build a sustainable firm (sustainability defined as a firm that maintains profitability over a long period of time). The swap is a move the owners and leaders make, not the team.
A further consideration in the recognition of the limited nature of firm capacity is in which team serves which client. Senior members of a team should only be working on clients that produce a higher margin of profit. In our firm, when we see that a legacy client is taking up the capacity of a senior team member, we will seek to remove one client from that team member and replace them with another. We can do this by either bringing a new lead into the firm and fire a legacy client, or by moving that one client to a different team member internally. The swap is important, so let me emphasize it. In seeking to perform this swap, we don’t just add a client. Instead we assess which client must go, and then we add a new client to replace the one we moved out of the firm. This important assessment is a risk, but one that can aid a firm in sustainable growth.
Again, our firm’s capacity is limited, so we can’t readily give our senior team’s capacity to just anyone. We’ll seek to lower their capacity by eliminating one client that is a low-profit producing client, and then replace that same capacity with a high-profit producing client. This is good for the firm and team member (we both make more money for the same amount of service being delivered), as well as for the new client we have chosen (they wanted to work with us anyway).
Noticing, assessing, and controlling the capacity of your firm is something that takes skill over time. It is worth practicing and learning as the value of this ability will allow you to lead a stronger firm with fewer clients, and enjoy your team and clients more. Here are four questions that can help you begin to work on this important skill in your firm:
- Is there a particular client that produces low value and minimal profit being served by one of your most valuable team members?
- Which client is obviously a detriment to your team and your firm’s growth that could be replaced with a more profitable client?
- Are your wisest, most experienced team members working on easy, low value clients?
- What part of your firm’s capacity is inefficient or being sucked up by work that could be delegated to a new position meant to serve the team?
As this year transitions into a new year, think about your capacity as a valuable asset in your firm. Paying attention to this ever-important part of your success may lead you to difficult decisions around your team and clients, but it will produce long-term sustainability and profitability that you’ve never experienced before. Do a new thing in the new year!