Three Key Questions You Need to Answer When Calculating and Measuring Utilization

Author: Categories: How To, Professional Services, Resource Utilization Management, Tutorials

Measuring Professional Services Utilization

Utilization. Every professional services firm I’ve ever worked with—whether they’re a management consultancy, a digital marketing organization, a technology implementer—calculates and measures utilization. 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.

Problem is, not everyone has a common understanding of utilization.

On the face of it, utilization is a simple concept that just measures how busy people are. You take the hours they’re 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 figuring out an approach to measuring utilization for your professional services firm:

What’s on the Top

The numerator of the utilization calculation is really 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.

Such a one-dimensional view, however, can sometimes lead to perverse 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, such as your product engineering or your sales teams, but who are still doing work vital to the organization? Do these situations benefit from a singular focus on billable utilization?

Many top-performing professional services firms take a more nuanced view, and oftentimes have multiple utilization measures. In additional to measuring billable utilization, they may also layer in the notion of chargeable utilization, which measures time spent on billable projects, but only hours that actually generate revenue. They may measure productive utilization, which also measures time spent on non-billable work deemed vital to the ongoing business of the firm, such as business development or product development. They may measure total utilization to make sure someone tucked away in the finance department isn’t constantly slogging through 100-hour weeks.

What’s on the Bottom

The denominator of the utilization calculation is driven by what the organization considers each person’s availability. Like with the numerator, how an organization calculates the denominator may also drive behavior. People are generally not working on billable projects or generating revenue or being productive on company holidays, when they’re on vacation, or when they’re home sick. Given that, the decision of whether to count those hours as available in the denominator affects the utilization calculation. If people feel like calling in sick 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. So, there are some advantages to keeping time away from the office out of the calculation.

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’re trying to measure. They may be trying to get a better understanding of capacity of their team—that is, how much productivity are they getting out of current staff without having to hire or fire. On the other hand, they may be trying to get an understanding of the efficiency of their labor investment—that is, how much productivity they are getting as compared to what they’re paying for. That difference may be non-existent if the entire staff is salaried, but start factoring in subcontractors paid on an hourly basis or non-exempt employees eligible for overtime, and it’s a whole different story.

What’s Good and What’s Bad

Once a firm has settled on an approach and gets a utilization percentage, it then needs to figure out 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.

Professional Services Performance Scorecard

Professional Services Performance Scorecard

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. If you’re the competitive sort who’s interested in quickly seeing how your organization’s billable utilization compares against industry benchmarks (and also against other organizations that use Projector as their Professional Services Automation tool), take a peek at our Professional Services Performance Scorecard.

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

More sophisticated firms then may use both a minimum and a maximum utilization target. Maximum targets may be used to help control overutilization (which may lead to high attrition). Max 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.

So, the point here is that what starts out as a fairly simple notion of figuring out how busy people are can get a little more nuanced, depending on what the organization is looking to accomplish. Firms should consciously and deliberately decide what assumptions and approaches to use and understand what behaviors those decisions are likely to drive. Everyone who is looking at, measuring, or optimizing for utilization needs to understand the assumptions employed and ensure the approaches are used consistent with their purpose. Finally, it’s useful to acknowledge that the different flavors of utilization and the different methods of calculating it are not all mutually exclusive, but rather can be used in concert with each other.

If you’re interested in learning more, we hosted an entire Projector e3 webinar discussing best practices on utilization management that’s accessible to current Projector clients. If you’re not yet a Projector user, check out our Professional Services Automation Infographic that shows how improving utilization can help you improve billability by nearly a whole month per billable employee per year.

With all of this newfound perspective, I just hope the next time Hamlet thinks about measuring utilization, this discussion helps to alleviate a little bit of his already considerable psychological anguish. Thus, as he concludes, “the rest is silence.”

If you’re interested in learning how PSA software can help consulting firms improve utilization by 6 percentage points, download our eBook entitled Professional Services Automation: A Quick Primer:

Check out our eBook:
Professional Services Automation: A Quick Primer.

2 Comments on “Three Key Questions You Need to Answer When Calculating and Measuring Utilization”

  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

Leave a Reply

Your email address will not be published. Required fields are marked *