What is Billable Utilization?
Billable utilization is the percentage of available hours spent generating revenue and is defined as: Billable Utilization % = (Number of Billable Hours / Number of Available Hours) X 100%. It’s one of the most important Key Performance Indicators (KPIs) measured by almost all professional services firms.
Billable 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 billable utilization. Every professional services manager—from the executive leadership level to delivery managers to department heads—tries to improve billable utilization. Every billable consultant is, at least in part, evaluated and compensated on billable utilization.
The problem is, not everyone has a common understanding of billable utilization or how to calculate it.
Table of Contents:
- Billable Utilization Formula Explained
- Billable Utilization Formula: Numerator
- Billable Utilization Formula: Denominator
- Utilization Benchmarks
- Utilization Targets
Billable Utilization Formula
On the face of it, billable utilization is a simple concept that measures how much time people are spending generating revenue. You take the hours that people are billable, divide by the hours they’re available and come up with a percentage:
Billable Utilization % = (Number of Hours People are Billable / Number of Hours People are Available) X 100%
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.
The trouble is, things are rarely that simple if you really want to use something like billable utilization to drive beneficial behaviors. Here’s what you need to think about when measuring billable utilization for your professional services firm.
Billable Utilization Formula: The Numerator
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?
A Nuanced View:
Many top-performing professional services firms take a more nuanced view, and oftentimes have multiple resource 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 logging 100-hour weeks
Billable Utilization Formula: The Denominator
The denominator of the resource utilization rate is driven by how the organization defines each person’s availability. Like 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.
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 the capacity of 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.
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 against 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 minus holidays and time off. This can then be compared to a minimum productive utilization target.
Minimum and Maximum Utilization Targets
In addition, more sophisticated firms may use both a minimum and a maximum utilization target to improve the discipline of professional services resource management. Maximum targets may be used to help control overutilization, which may lead to unwanted employee attrition as described in a recent Forbes article on consulting burnout. 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.
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.
One of the most important aspects of measuring and managing utilization is being able to do it easily and consistently. Professional Services Automation Software can help consulting firms do this, resulting in improved utilization of 7 percentage points. This translates into improved billability of nearly a whole month per billable employee per year.
Finally, it’s important to understand that the different methods of calculating billable utilization are not all mutually exclusive, but rather can be used in concert with one another. It’s also critical to know that optimizing utilization in isolation can actually be detrimental to the health of a services organization, and needs to be done in concert with all the other KPIs in the business. To learn more about these other metrics, download our white paper Metrics that Matter for Professional Services Organizations: The Basics and Beyond. Or read more about billable utilization in our post about rethinking growth metrics. And don’t forget to download the SPI research for benchmarking targets.