How to Measure and Calculate Billable Utilization: Formula for Professional Services

Author: Categories: Benefits, Efficiency, Professional Services, PSA Software, Resource Management

What is billable utilization in professional services
what is billable utilization professional services

What is Billable Utilization?

Utilization. Every professional services firm I’ve ever worked with—whether they’re a management consultancy, a digital marketing organization, or a technology implementer—calculates and measures a billable utilization formula. Every professional services manager—from the executive leadership level to delivery managers to department heads—tries to improve utilization. Every billable consultant is, at least in part, evaluated and compensated on utilization.

Billable utilization is a critical success factor in project management. However, the problem is, not everyone has a common understanding of utilization rate or how to calculate resource utilization in a project.

The good news is that there’s a savvy way to think about measuring resource utilization metrics, and PSA solutions have a proven track record in improving professional services performance metrics, including a 7% improvement in billable utilization.

Table of Contents:

Billable Utilization Formula

On the face of it, utilization is a simple concept that measures how busy people are. You take the hours that people are busy, divide by the hours they’re available and come up with a percentage. Compare that percentage to other firms, to other departments, to other people, and (at least in theory) you have a way of measuring performance…as long as everyone’s calculating utilization the same way. In the immortal words of Hamlet when he was thinking about utilization calculations, “Aye, there’s the rub.”

Here’s what you need to think about when measuring billable utilization for your professional services firm.

billable utilization formula

Billable Utilization Formula: The Numerator

Explanation:

The numerator of the utilization calculation is driven by what behavior you want to encourage. Most services organizations take a very simplistic view and just measure billable utilization…time spent working on billable projects.

A Simple View:

Such a one-dimensional view, however, can sometimes lead to contradictory incentives. Should the less efficient consultant who spends more time on a particular task than a more efficient consultant get more utilization credit?

What about a person who does a bunch of work that you can’t charge the client for because someone else had to redo it? How do you measure people who aren’t working directly on billable projects but rather internal projects, yet are still doing work vital to the organization? Do these situations still benefit from a singular focus on billable utilization as their employee utilization rate?

As you can see, measuring resource utilization in project management is more complicated than at first glance.

A Nuanced View:

Many top-performing professional services firms take a more nuanced view, and oftentimes have multiple utilization measures. In addition to measuring billable utilization, they may also measure:

  • Chargeable utilization: measures time spent on billable projects, but only billable time that actually generates revenue
  • Productive utilization: measures the number of hours spent on non-billable work deemed vital to the ongoing business of the firm, such as business development or product development
  • Total utilization: measures overall utilization, for example, to make sure someone in the finance department isn’t consistently time tracking 100-hour weeks

Billable Utilization Formula: The Denominator

Explanation:

The denominator of the resource utilization rate is driven by how the organization defines each person’s availability. Similarly to the numerator, how an organization calculates the denominator may also drive behavior.

A Simple View:

For example, people are generally not working on billable projects or generating revenue during company holidays or sick time. Given that, the decision of whether or not to count those hours as available hours in the denominator affects the utilization calculation of what you’ll plug-in to the billable hours divided by formula. 

If people feel that taking sick time will count against them when computing their utilization, they may be less likely to stay in bed when they’re ill. In addition, since the summer months and the holidays are oftentimes peak times for vacation, including time off and holidays in the denominator can lead to variability due to seasonal effects in utilization. 

As a result, there are some advantages to keeping time away from the office out of the calculation.

A Nuanced View:

Like with the numerator, many top-performing firms will also take a more nuanced view of the utilization calculation’s denominator, depending on what they are trying to measure. 

They may want a better understanding of capacity on their team. In other words, how much productivity are they getting out of current staff without adding or removing people from the organization? 

On the other hand, they may want an understanding of the efficiency of their labor investment. In other words, how much productivity is the company receiving in comparison to what they’re paying for? That difference may be non-existent if the entire staff is salaried. However, when you start factoring in subcontractors paid on an hourly basis or non-exempt employees eligible for overtime, it’s a whole different story.

Professional Services Utilization Benchmark

Explanation:

Once a firm has settled on an approach to calculate a utilization percentage, the next step is to determine what a reasonable utilization target is. Or, perhaps I should say what its approaches are and what reasonable utilization targets are—both of which may vary depending on the firm’s needs and goals.

A Simple View:

Many organizations will measure billable utilization versus a 2,000 hour per year target when benchmarking themselves against the market. It’s simple, it’s consistent, it doesn’t require a ton of thought, and it’s easily comparable to industry benchmarks like the SPI Benchmark Survey.

A Nuanced View:

Also, companies may take a slightly more nuanced, but still straightforward measure for individual team members in the form of bonus calculations or metrics on individual dashboards. This measure is often utilization-based on productive hours divided by working hours less holidays and time off. This can then be compared to a minimum productive utilization target.

Helpful Tip: Set a Minimum and Maximum Utilization Target

Billable utilization target benchmarksIn addition, more sophisticated firms may use both a minimum and a maximum utilization target to improve professional services resource management. Maximum targets may be used to help control overutilization, which may lead to high attrition. Maximum billable or chargeable targets can also help ensure partially-billable managers set aside sufficient time for other activities such as staff development or account management.

In Summary

To sum it all up, a fairly simple notion of determining how busy people are is more nuanced than meets the eye, depending on what the organization is looking to accomplish. 

Firms should consciously and deliberately decide which assumptions and approaches to use and understand what behaviors those decisions are likely to drive. Everyone who is responsible for measuring and optimizing resource utilization rates needs to understand the assumptions and ensure that the approaches are used consistently with their intent.

Finally, it’s useful to acknowledge that the different methods of calculating billable utilization are not all mutually exclusive, but rather can be used in concert with one another.

Professional Services Automation Software can help consulting firms improve utilization by 7 percentage points. In addition, improving utilization can help you improve billability by nearly a whole month per billable employee per year.

professional services billable utilization benchmark

How Does Your Firm’s Utilization Compare?

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2 Comments on “How to Measure and Calculate Billable Utilization: Formula for Professional Services”

  1. All nice and good on paper. How do measure the “effeciency” of a professional who, through in depth knowledge, experience and networks, spends 8 hours to prevent the company from losing its key account and potential multi million dollar fee? How do you reward him/her?How do the Bean Counters measure that 8 hours which is not even billable? The only methodology that’s now relevant to Professional Practices is Theory of Constraints and LEAN and a bit of Agile. The rest is still archaic 1920 Frédéric Taylor derived nonsense “Science” when applied to Professional Practices.

    1. Hi Santosh,

      Thanks very much for your comments.

      You’re absolutely right in that using billable utilization as the sole, one-dimensional metric to run the business can be counterproductive. In fact, under the “What’s on the Top” section, we argue for a more nuanced view of utilization instead of or in addition to simple billable utilization. The sort of valuable work that you’re talking about…account management, product development, investment in client relationships, business development, and the like…should be encouraged and, as we argue, should be measured as part of productive utilization.

      I do like where you’re going with thinking about how Theory of Constraints and Lean apply to the world of professional services. I started my career in manufacturing environments, deploying these sorts of strategies to help make our production operations more competitive. Subsequently, I have moved over to utilizing these same concepts to manage professional services operations. The whole key to ToC is identifying and alleviating bottlenecks in a process. In the professional services world, utilization is a key metric that can help you understand where that bottleneck lies. For instance, suppose you build custom software that generally goes through technical architecture, development, and testing phases. If the utilization of your technical architects, developers, and testers is 20%, 25%, and 110%, respectively, that can give you a good sense of where you may need to hire or to increase efficiency to improve throughput of your entire system.

      Finally, I won’t defend the entirety of the scientific management movement as envisioned by Taylor. At the same time, I’m not sure I agree that all of Taylorism is archaic nonsense that lacks relevance in a modern services economy. His emphasis on standardization has led to adoption of templates and best practices today, which is key to scaling a professional services firm. His focus on empiricism manifests itself in the deployment of the metrics, scorecards, and dashboards that are used across industries. His drive towards waste elimination has evolved into the very useful philosophies of continuous improvement and lean manufacturing itself. I think the key to sound business management is to understand the underlying principles behind a movement and, as thinking evolves, to discard those aspects that are no longer relevant while retaining and improving upon those that are.

      At any rate, thanks for the thoughts, and we very much welcome further discussion on this intriguing topic.

      Best,
      Steve Chong

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