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What is the difference between Scrum Capacity and Velocity ?

I have spoken to a number of people about their understanding of the words, Scrum Capacity, and Scrum Planning, and it is quite clear that there is some confusion about this; consulting the literature related to this topic gives a few such pointers, but is not easy. So I did some research, talked to some experts in the organization who have been working with Scrum for quite some time, and came up with some answers that seemed to make sense, so here goes.
The basic difference between Scrum Capacity and Scrum Velocity is that one is a forward looking indicator (Scrum Capacity), while one is a measurement of the past (Scrum Velocity). Scrum Velocity is a measurement of the number of Sprint Points that have been completed in the previous Sprint, and is measured at the end of the Sprint. This would mean capturing the total number of man-hours spent during the Sprint (by actually asking the team members to fill in the number of hours they have spent per day), and this is co-related with the number of Sprint points (features) delivered during the Sprint cycle. This gives the Velocity for the Sprint cycle.
The Scrum Capacity is the potential for the total amount of work that is possible during the Sprint (with a realistic assumption). This is done by taking the total number of team members available, doing a realistic assumption of the number of hours per day that a person can spend directly on the tasks (which means that if a person spends 8 hours per day in the office, then the capacity of the person would be around 5-6 hours per day on the tasks assigned to the person), and then multiplying the total number of days available in the Sprint. This would also mean that time needed for people to spend on vacations, etc needs to be removed from this calculation of capacity.
Theoretically, the Sprint Velocity and Sprint Capacity should be approximately the same, even more so if the team feels that a realistic sense of assumptions are made while calculating the capacity. After all, the capacity is used to determine the ability of a team to deliver a set of features per Sprint cycle, and overall, for the duration of the projects. If there is a difference between the Velocity and the Capacity, it means that the team should try to understand the reason for the differences and whether those reasons can be incorporated the next time the Sprint capacity is calculated. This also would lead to the team do a more accurate prediction, which is something that is invaluable when it comes to the team pitching for a new project, and so that they can work towards their set of commitments. If the team continues to have a large set of differences between the capacity and velocity, then this would be a matter of concern and needs to be addressed.

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