Let’s face it: Not every hour at work is created equal.
Some hours are more productive, and some hours are less effectively used.
While this is true in most industries, companies like professional service firms that bill by the hour are particularly affected by this phenomenon. When every billable hour isn’t created equal, how do you measure the health of your firm?
The first step is to distinguish between different types of hours.
All hours are not billable to the client.
Important functions like business development, pro bono work, staff training, and team building activities make up a firm’s non-billable hours. They’re not directly billable to a client yet these hours often make the billable work possible by addressing internal firm operations.
The rest of the time constitutes your firm’s billable hours. Combined with non-billable hours, these make up your total available hours.
This is where the all-important utilization rate comes in.
This metric shows you how much of your employees’ available time is spent on billable work. If the rate is too low, you’re not bringing in enough work for the firm. If the utilization rate is too high, you’ll probably need more resources to handle your workload.
For example, if an employee works 1600 hours out of 1800 available hours, she would have a utilization rate of roughly 88.88%.
Below we’ll discuss the utilization rate a bit further (particularly how it impacts the overall health of your firm), how you can track it, as well as a few strategies to improve it.
Measuring Firm Operational Efficiency With Utilization Rate And Related Metrics
When measuring your firm’s operational health, try a blend of utilization metrics.
This means pulling together the needs of company growth, employee development, revenue, and retention when assessing firm efficiency. These metrics should also consider near-term and long-term business objectives for the firm.
These are the most commonly-used KPIs for professional service firms:
Your realization rate measures your total billed hours worked out of all available billable hours for a specific resource.
In the example above, if your firm set aside 200 hours for non-billable work, the total billable hours would be 1600. The employee working 1600 hours would then have a realization rate of 100% (as they billed the maximum number of billable hours).
The good news is that both realization and utilization rates can be calculated on a weekly, monthly, or even yearly basis.
Agency Realization Rate
You can also calculate the utilization rate for all billable staff with this formula:
If three resources have a utilization rate of 66%, 86%, and 80%, the agency’s utilization rate is 77.34%.
Billable (Or Chargeable) Utilization
This metric identifies the percentage of billable hours that are actually charged to the client.
Chances are, your firm will not get paid for 100% of the billed work. Some hours will be written off or redone, forcing you to eat some of those billed hours. Billable utilization shows you which percentage of your total billed hours actually resulted in revenue.
That’s an important figure when it comes to firm profitability.
The challenge with billable utilization is that it is often delayed since you can’t see within an ongoing project whether revisions will be needed at a later point. Despite this small challenge, you should still track billable utilization on a regularly basis (quarterly is sufficient) to get a sense of what your charging versus what you’re actually billing.
Along with key metrics like realization rate, agency realization rate, and billable utilization, there are a number of other important metrics to consider when measuring your firm’s overall health. Here are a few related metrics that firms use to understand how their time is being spent (and its relative value):
- Annual Revenue per Billable Consultant
- Annual Revenue per Employee
- Project Overruns
- Profit Margin
- Sales Pipeline
- Resource Utilization
Paired with utilization rate and the metrics expanded upon above, these sub-metrics help you understand the overall performance of your firm through multiple lenses. From identifying particularly costly clients to addressing less profitable service offerings, these benchmarks give you a more complete picture of your firm’s overall performance.
How Utilization Rate Affects Your Agency’s Operations
Your utilization rate is a deceptively simple metric.
Leveraged in the right way, it can give you a good deal of insight into your agency’s profitability as well as its productivity. Let us count the ways:
- Demand for services: If you track utilization rate by skill, you can measure the demand for different services your firm offers.
- Track burnout: If your utilization rate is consistently high, then your employees are likely overworked.
- Measure resource allocation: If your utilization rate is often quite low, you likely need to bring in more work for your team.
- Assist with hiring: Tracking your utilization rates by skill and employee type allows you to plan your hiring better.
- Identify gaps: If there is a significant gap between your utilization and realization rates, then your team is spending too much time on non-billable items.
- Show “scope creep”: If your utilization rate is over 100%, this suggests out-of-scope work is being completed and that planning could be improved.
- Identify profitable services: If you link your utilization rates to profits, you can see which services are most profitable for your firm.
- Address client misalignment: If you track your utilization rate by client, you can measure which clients are profitable and which ones tend to drain resources from the firm.
Taken together, your utilization rate, when leveraged correctly, can help you understand your own billing rates better, map skills to actual client demand, develop the talent within your firm, and drive profitability.
That’s one powerful metric.
How to Increase Your Firm’s Utilization Rate
You’re not at the mercy of chance when it comes to your firm’s utilization rates.
There are proven ways to boost it.
Time-tracking software will help you measure how time is being used within your firm. Such software also gives you reporting capabilities to help with longer-term strategic shifts in how time is being managed within your firm.
Set utilization rate benchmarks with your employees and offer them resources to meet those ambitious goals. Doing so enlists the entire team in a critical metric in your firm’s profitability. Ideally, you’re tracking utilization rates across the entire agency.
You should also get a handle on how much time your firm is wasting and cut down on aspects of firm life that bring your utilization rates down. Valueless “bench time” should be minimized as much as possible. Invest in a workspace management tool that will automate and streamline labor-intensive tasks while helping you make the most of your employees’ valuable time.
Wherever you are with your current utilization and other firm health metrics, there’s still time to make a few shifts that will improve your firm’s operational efficiency while boosting those profit margins.