Resource Allocation | 9 mins read

Complete Guide to Resource Allocation For Businesses

complete guide to resource allocation for businesses
Jin Hyun

By Jin Hyun

Companies that actively and routinely assess the use of their resources and where they create the most value usually find themselves in a better position to improve operations and deliver higher ROI.

According to research by McKinsey, 83% of senior executives see resource allocation as the leading management tool for driving growth - surpassing operational excellence and mergers and acquisitions (M&A) in importance.

However, not many organizations are effective in managing and allocating resources. McKinsey also found that a third of the senior executives they surveyed only reallocate 1% of their capital every year, while the average is 8%.

Resource Allocation Defined

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In a nutshell, resource allocation is the strategic use of resources to accomplish a project and all other activities under it. As a crucial component of project management, resource allocation is how companies decide how to use assets and resources for the production of goods and services. It also ensures that people have the tools, materials, and time to accomplish their daily tasks.

Effective resource allocation plays a vital role in an organization's ability to deliver projects on time and within budget. The goal is to make sure that the use of resources maximizes ROI and reduces wastage.

This may seem simple enough, but determining the optimal amount of resources for a project requires more than just matching a person, tools, and materials to a task. There are multiple factors to consider, including resource scarcity, organizational goals and politics, and risk aversion.

The major challenge for organizational leaders and project managers is figuring out which resources to allocate, as well as when and where to allocate these supplies.

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Types of Resources in Project Management

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All organizations in virtually every type of industry need resources, whether it's people, tools, materials, or time. A resource can be viewed as an asset that is both directly and indirectly used in the production of goods or services.

Below are the 4 types of resources, according to the Business Model Canvas framework.

  • Physical Resources - Physical resources include buildings, production facilities, warehouses, offices, machinery and equipment, vehicles, and physical systems. Certain businesses, like wholesale retailers, are dependent on physical resources like warehouses and distribution facilities. Other organizations, such as tech startups, need extensive IT infrastructure.
  • Intellectual Resources - Intellectual resources include brands, patents, trademarks, and trade knowledge. These resources are time-intensive, requiring multiple man-hours to develop. But once developed, they can become a primary profit driver. Companies like Apple and Microsoft, for example, create revenue from their hardware and software properties.
  • Human Resources - An organization's people are among its most important resources. A hospital, for example, is highly reliant on skilled human resources, such as doctors, nurses, physical therapists, and laboratory technicians.
  • Financial Resources - Financial resources include cash, credit, shares, and bonds. Every organization needs financial assets to pay for rent, utilities, and raw materials among other expenses.

How to Allocate Resources in an Organization

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Different organizations usually have varying approaches to the resource allocation process. Still, most companies will use some variation of the following resource management steps when running a project.

1. Break Down Projects Into Tasks

Breaking down large projects into smaller, more manageable tasks is a core tenet of project management. By doing so, project managers can create milestones and make it easier to track the project's progress.

Resource allocation is an essential part of this process because each task and milestone requires resources to accomplish. The same logic appliesbreaking down the project by task makes it easier to accurately assign resources.

2. Assign Resources

With the project broken down into multiple tasks, the next step is to assign resources. Most tasks generally require a human resource - a person to take charge of the task and/or a team member to perform actions.

For example, a retail company wishing to explore the feasibility of a new product line (project) may assign the marketing team to conduct research with focus groups. This task also requires input materials, such as the people who make up the focus group, a conference room, and product prototypes in order to produce an output.

3. Determine the Resource Requirements

When assigning resources to tasks, each resource must have the necessary attributes to perform project work. Examples of resource requirements include-

  • Skill - This requirement is specific to human resources and refers to a person's expertise and skill at performing a task.
  • Grade - Grade is a category or ranking system for resources with the same essential function but different technical specifications that result in different output standards. For example, there are vacuum cleaners for industrial use and home use.
  • Quality - Not to be confused with the grade, quality refers to the condition of resources. For example, is the industrial vacuum cleaner in working condition? Are all its attachments available?
  • Availability - This requirement ensures that resources are available before being assigned. For example, a truck may be out of commission due to repairs, or an employee may be unavailable because they are on leave.
  • Miscellaneous Attributes - These include resource-specific requirements such as size, color, length, and shape.

4. Resource Leveling

Resource leveling is the process of ensuring tasks are scheduled optimally to ensure project activities aren't impeded due to a lack of resources. In many scenarios, the project schedule is often extended to ensure resource usage is as stable or smooth as possible.

This prevents problems such as having an employee working 2 hours on a task one day and 14 hours the next, requiring the company to pay overtime.

5. Re-allocate Resources

Scarcity is a problem every project manager has to consider in their allocation strategy. Raw materials may not arrive on time, a key employee may have to take sick leave, and cash may be diverted to other projects.

6. Monitor Utilization Rates

It's common for project managers to be unaware that resources have already arrived but are not being used. Likewise, human resources such as employees and contractors could be getting paid but are not being leveraged to complete project tasks.

Tracking resource utilization rates prevents this problem. To do this, simply calculate the percentage of billable time.

Utilization Rate = Total Billable Hours / Total Hours

For example, if an employee worked only 10 hours on a project task out of the total 40 hours a week, their usage rate would be 25% and corrective action would be needed.

Common Challenges When Allocating Resources

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A Wellingtone report shows that poor resource management was the second-biggest project management challenge of 2019, increasing by 60% in importance over the previous year. Generally speaking, the difficulty of resource allocation boils down to these issues-

  • Scheduling Changes
Changes to the timeline and schedule are a common source of frustration for project teams. Sometimes, a project manager may be forced to push up a project deadline - a common problem for retailers that run out of inventory during peak periods, for example. Other times, a client may want to expedite the project.

There are also instances when tasks in a project take longer than expected due to an unforeseen event. This can have a cascading effect, causing delays due to the unavailability of resources (e.g., contractors and employees) down the line.

  • Changes in Resource Availability
Not having sufficient resources and not having the right resources to perform tasks presents problems for allocation. Research by McKinsey shows this as the second leading barrier to resource allocation.

A common scenario during a project is not having the right people when they are needed, which means either looking for other people or changing the project timeline itself.

  • Project Scope Changes
Changes in the scope of the project could have serious repercussions on tasks and how resources are allocated. New tasks could mean that new people have to be brought in. These activities may also require additional tools and materials to be used.

This also means that project managers have to go through the process of requesting new resources or amending their initial requests for resources. Either way, these setbacks can throw off the entire project.

  • Task Dependencies
Whenever one task in a project needs to be completed for another to begin, this creates a dependency. However, having one part of the project depend on another to be finished introduces potential problems.

For instance, what if Task A takes a week longer than initially planned? This also pushes back the deadline for Task B. Things get even more complicated when the team assigned to work on Task B is only available on the week it was originally scheduled. Now the project manager has to figure out how to work around the new project timeline and bring in a new team.

  • Project Urgency
The trend of multi-teaming, where people can be assigned to multiple teams and projects simultaneously, highlights the importance of managers being aware of all projects happening in the organization.

It's common for a project that came in first to be pushed aside to make way for an entirely new and more urgent task. When this happens, project managers must be able to re-allocate people while keeping a skeletal team within the earlier project.

  • Lack of Teamwork
Finally, it's important for the people in a project team to be able to work together. This is easy enough with smaller groups. But with large projects requiring many people with different skill sets and areas of expertise, it can be challenging to get everyone on the same page, much less work towards a unified goal.

When assembling a group of people who may not work together frequently, consider holding team-building sessions to allow team members to get comfortable with each other.

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Improving Resource Allocation with Resource Forecasting

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Much of the success of resource allocation depends on effective planning. This is where resource forecasting comes in.

As the name suggests, resource forecasting seeks to predict what resources an organization will need in the future to execute projects. When project managers conduct these forecasts, they rely on a combination of historical resource data and current project data to estimate-

  • The number of people to hire
  • The skills needed from recruits
  • The quantity, grade, and quality of materials
  • The required tools and facilities
By using resource planning and forecasting software, project managers can see into their sales and resource pipelines to accurately predict their needs. Unlike spreadsheet programs where data has to be updated manually, forecasting software provides a real-time view of resource allocation history that can be shared between project managers and their teams. This makes it easy for resource planning and allocation to be more agile.

When it comes down to it, resource allocation is equal parts art and science. It requires foresight and intuition, but also a deep understanding of how, where, and when the organization uses its resources. With the right planning and forecasting tools, project managers can spend less time on repetitive and routine tasks, and focus on more strategic and value-creating work.

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