Whether you’re running a consulting company or a software firm, utilization is an important performance indicator for all professional service businesses. Therefore understanding its basics is of the essence.
Why utilization is important?
The importance of utilization is highlighted in service business, because they sell the time and resource capacity of their people. Every service company should try to improve their utilization rate, because high utilization of their employees drives higher billing, higher revenue, and ultimately, higher profits. Therefore, it is a critical measure of financial success and sustainability.
What is utilization?
In its most simple form, utilization rate is a measure of productive time spent working. This calculation is presented as a percentage. Calculating it should be simple enough for everyone to understand and measure and it should be used consistently across the organization and its employees.
In general, there are three levels of utilization. Most service companies actually take very simplistic view and focus primarily on one level, like time spent working on billable projects. Yet many top-performing services companies take into account other factors, and focus on all three.
The billable utilization measures the time spent working on billable projects and tasks. This measure doesn’t take into account non-billable work, such as administrative tasks, internal projects, or business development, since it is not billed from the client.
Resource utilization measures how resources have been allocated to work on all projects and tasks. It calculates the the allocation of a resource on a specific set of work, client, and internal work. Therefore, it measures both billable work and non-billable work. That helps managers minimize administrative work. If a resource is not billing her time at that moment, at least the company can have her/him working on valuable internal projects or sales efforts that benefit the company in the longer run.
The realization measures how much of a company’s revenue capacity was captured during a project or a period of time. The objective of this measure is to determine how much of the time the resource spent on billable work was actually billed from the customer. In this measure internal projects and business development are not included.
There are some challenges, especially with billable utilization. Tracking and measuring solely on billable hours poses challenges for those with non-billable development or administrative tasks, which do not produce revenue, at least directly. And if reviews and decisions about compensation and promotion are conducted based on employees’ billable hours, people with administrative tasks are bound to have a low utilization rate. This deceptively understates their effort and contribution to the firm.
High utilization means profitable business and financial success. It is therefore important for professional service companies to understand that by correctly measuring their utilization can help them to gain a comprehensive and more accurate view of their business. Which metric to choose for your company to get that big picture, there is no clear answer. That requires an in-depth understanding of your business. However, one thing is for sure, whatever calculation you choose, it should be simple and applied consistently across your employees.
PlanMill Ltd. is a leading provider of user-friendly web-based CRM, PROJECT and ERP Cloud solutions designed for the service business. We enable organizations to streamline business processes, improve control of their customers, personnel, projects and finance – while enhancing productivity and profitability.