How-to-Guide: Measuring & Improving Billable Utilization

Billable utilization is calculated by dividing the number of billable hours by the total number of available hours (typically with allocated holiday time not included), and then multiplying by 100.

The formula for billable utilization is as follows: Utilization = Billable Hours/Total Hours x 100%.

Example: A consulting firm assigns one of their resources to a client, and the project is expected to be completed in one year and 1,200 billable hours. Assume total hours available (capacity) are based on a 40-hour work week across 52 weeks of the year (minus holidays). This is roughly 2,000 hours.

A target utilization rate is calculated by taking the percentage of billable time vs. the total capacity required out of resources to hit your revenue goals. Understanding and calculating target utilization is key for any business hoping to be profitable. Target utilization varies from one company to the next – it depends on the financial and workforce objectives of each organization. Target utilization rates that are set too high often result in long-term attrition issues. On the other hand, a low target results in underperformance and will have a negative impact on profitability and revenue generation.

There is no right answer when it comes to setting utilization targets – they just need to align with the capacity of your workforce and your revenue goals. Setting clear targets enables resources and managers to have a benchmark to measure against. If 70% is the decided upon target, anything above that threshold may signify resources are being overworked (overutilization), and anything below that threshold reveals resources are not spending enough time on revenue-generating work (underutilization). Both have a significant impact on the success of any business — as people are the primary revenue generator at services organizations.

Underutilization occurs when an employee’s billable workload is less than the agreed upon target utilization rate. Underutilization happens when resources are inefficiently used or not used to the fullest capacity. The lower the utilization rate, the more room resources have to take on more work. Keep this in mind when considering underutilization though: the goal is not to get all resources to hit a 100% utilization rate. That is simply not sustainable. Just because an employee has remaining capacity after logging billable work does not mean they are being underutilized. They need that time to do productive (but non-billable work). It’s only when a resource’s utilization percentage significantly (and consistently) falls below the target that you should classify them as underutilized.

When resources are underutilized, they have a significant — and negative — impact on the business. Optimized resource management requires reducing the number of underutilized resources so they have ample opportunity to generate revenue.

Resources can only generate revenue if they are assigned to billable work. If resources are being underutilized, they need to be matched to projects as soon as possible so profitability doesn’t get depleted while they are sitting on the bench costing your business money and not doing revenue-generating work.

Overutilization occurs when the hours spent by employees on billable work exceeds their total available hours (also referred to as capacity). Resources that are hitting utilization rates above your target are not necessarily overutilized, but it does alert managers to keep an eye on the resource. Going over target is not a negative thing in and of itself (from a profitability perspective, it has obvious benefits); however, when it happens on a consistent basis, it’s likely that the resource is nearing a threshold of work that is not realistic over the long term.

Consistently overutilized employees have often been assigned to an unsustainable workload, and are more susceptible to burnout. Burnout often results in reduced productivity and compromises the quality of work being delivered to clients – and it can also compound stress for key resources who might eventually opt to leave. If you find that your business has a number of resources who are consistently overutilized and you struggle to balance utilization across your workforce, consider checking out these nine tips to improve resource utilization in the next 30, 60, and 90 days.

In order to effectively manage resources and measure billable utilization trends accurately, you must have complete visibility into the hours resources are spending on billable work. To actually monitor utilization trends across time, there must be a time tracking system in place, and resources must enter all the hours spent on projects in a timely and accurate manner. Business decisions or adjustments can be made based on any emerging trends, and will be beneficial to resources, clients, and the greater success of the organization — as long as the trends are backed by accurate data.

Looking for trends is much more valuable than trying to compare individual performance. If billable utilization is going down across the company over time, that would be a reason for concern. Alternatively, if you manage to raise average billable utilization by a percentage point or two, it will have a direct effect on revenue.

To get a handle on tracking their billable utilization rates, many companies invest in a solution with resource management capabilities purpose-built for professional services organizations. These tools provide businesses with the insights they need to ensure their resources spend more time on appropriate, billable projects that have the greatest potential to drive revenue.

Now that we’ve covered some of the basics, including how to calculate the key metrics associated with billable utilization, it’s time to suggest a few actionable ways to improve utilization rates at your organization. Simply inputting accurate data and tracking trends is not enough. Having the right data stored in a trusted software tool is step one, but knowing how to use this data to inform business decisions is where the real value comes into play.

Once you are able to accurately calculate billable utilization metrics across all resources and projects over time (historic, current, and projected into the upcoming periods), you can easily see where there are opportunities for adjustments to be made to improve profitability or productivity. If resources are being underutilized, you can take action immediately to get them on revenue-generating work. On the other hand, if resources are being overutilized, you can see well ahead of time when they need to take a break from billable work before burnout.

The benefits of improved utilization rates are significant and improving these rates should be the first priority for any organization looking to streamline resource management and increase revenue. For example, for a 100-person services team, increasing billable time by one hour per week, per person, at an average realized bill rate of $200 per hour increases annual revenue by $1M. Try this Resource Utilization and Revenue Calculator to see the potential impact a seemingly small improvement in your average billable utilization rate could have on professional services profitability – even a 1% improvement could mean millions of dollars in added revenue for your business.

There are countless actions that can be taken to improve utilization rates, but the five practices below are a great place to start.

Managing resources effectively is the biggest challenge faced by services organizations today. In commissioned research from Forrester Consulting, professional services decision-makers identified an inability to predict project resource needs in advance as their most pervasive challenge – 59% of respondents said they found it very challenging.

The best place to start when it comes to optimizing resource management and allocation, ensuring you have the right-sized team for the work ahead, is auditing how your business measures and analyzes billable utilization data. Profitable, scalable, and optimized resource management can only be done when an organization understands the importance of billable utilization. Therefore, knowing how to calculate, track, and improve billable utilization is essential to driving profitability and increasing revenue.

In services, the more billable hours, the greater the potential revenue that can be generated from those hours. And, the greater the billable utilization of a given resource, the more revenue you’re able to generate from that resource against the cost of their salary or contract. Utilization can, therefore, have a significant impact on both your top and bottom line. In this How-to-Guide, we’ll explore basic definitions, formulas, examples, and best practices for how to measure and improve billable utilization and resource management at your organization.

1. INVEST IN EASY-TO-USE TIME TRACKING TOOLS

Streamlining time tracking is where you want to start, as it’s central to analyzing utilization. Almost all services organizations track time in some capacity. Most will also admit to needing to improve time tracking processes and compliance. Start by simplifying and standardizing project plans and templates and the associated methods you use to capture and track time. Keep it simple and make sure that team members can input time easily and from any device. Then be sure to provide detailed, written policies and procedures for all team members – no exceptions.

Once you have comprehensive and reliable time tracking in place, implement regular audits of time tracking and utilization (at a minimum, do this monthly, but weekly or even daily audits can be even more effective) to be sure time entries are being submitted by all resources and to keep an eye on utilization trends. Review and highlight under- or overutilized team members. Finally, take swift action to get your underutilized people billable again.

2. EMPOWER YOUR TEAM WITH VISIBILITY INTO PROJECT AND RESOURCE DATA

Improving billable utilization rates is impossible without complete visibility into up-to-date and accurate project and resource data. Insight into the progress of projects across portfolios anc clients, the time already spent on billable work, as well as the time still required before project completion is key to strategically assigning resources to projects. Without access to this data, resources will be assigned using gut instinct, which hardly ever results in improved utilization rates.

Many organizations leverage a SaaS solution with automation and business intelligence capabilities to house this data — including timesheet information and how things are progressing against milestones or initial scope. Trying to manage utilization metrics in spreadsheets quickly becomes unwieldy, so a resource management tool that is purpose-built for professional services organizations allows businesses to easily access information that they can be confident is accurate, up-to-date, and reflective of the current state of projects.

In addition to housing key data, professional services software solutions often provide alerts or surface red flags when a project may be veering off course, require more time from resources, or require additional or new resources altogether. Having visibility and instant access to project and resource data means there are fewer nasty surprises at the end of projects, where expensive resources have to be pulled in, perhaps from other projects, to put in hours to get the project back on track.

3. ALLOCATE RESOURCES PROACTIVELY, BEFORE THE CONTRACT IS SIGNED

Proactively allocating resources so that they spend as much of their time as possible working on billable work requires a great deal of planning. In a business that is resourcing reactively, time is often wasted moving resources from one engagement to another at short notice. Or people may end up on the bench between projects, with days or even weeks when there is no billable work for them.

One of the primary culprits for reactivity is the tendency organizations have to only commit resources to projects after contracts have been signed. In many cases, this is based on an earned skepticism about how much resource managers and project managers can trust data in the sales pipeline, where deals that seem likely never materialize, and close dates and project start dates fluctuate wildly. But if you can institute a culture of proactive resource allocation, where resources are soft-booked onto projects as soon as they reach a certain threshold of probability, it can have a significant impact on not just the timeliness if project kick-offs, but also on a forward-looking outlook on utilization that will enable your decision-makers to see conflicts and overutilization sooner and do something about it before revenue or client satisfaction are impacted.

By connecting purpose-built resource management software with your CRM, you get unprecedented visibility into the balance of demand and supply — the capacity of your global resource pool – unlocking windows of billable time that may have previously been siloed within a department or a single team. You get a more granular view of time and can allocate it in smaller amounts – hours instead of days. These insights and capabilities make it easier for resource managers to get the right resources in front of the right customers more of the time. Looking ahead and soft-booking projects as soon as they reach a high degree of probability, enables resource managers to plan ahead more effectively, maximizing the use of employees instead of expensive contractors, and assigning the best-fit teams to projects.

4. ESTABLISH A CENTRALIZED TALENT POOL AND SKILLS DATABASE

Centralization allows you to fill gaps quickly by tapping excess internal capacity before looking outside to a partner, freelancer, or contractor. For example, if a project hits delays and goes longer than expected, it’s likely that one (or all) of the resources on the original project are already soft-booked to an upcoming project. This causes a snowball effect — as those resources will not be available to start the next project until the first is complete. This ends up with project start dates being pushed, and delayed time-to-value for the customer.

Professional services projects are inherently unpredictable – because they are being delivered to a client with shifting priorities, the scope often changes, and timelines are not always set in stone. This means that resource managers must make last minute decisions around how to fill gaps that emerge. This often results in turning to more expensive resources like contractors to ensure a project can get up and running as quickly as possible. Turning to external resources is really just a short-term solution. In the long-term, consistently paying contractors or freelancers will eat into revenue, as they are almost always more expensive than leveraging an internal resource.

You can never be fully prepared for the changes that occur when delivering services, but having processes and systems in place for when the change does happen allows organizations to react to these changes strategically and adjust accordingly. One way to reduce last minute scrambles to fill resource gaps is having a one-stop-shop for managers to see exactly what internal talent and skills are currently available. This has the added benefit of getting a potentially underutilized resource from somewhere else in the organization off the bench and onto a project. As suggested by a recent skills survey from SPI, the best way to do this is by establishing a single talent pool and skills database across the entire organization. When faced with last minute resource demands — often caused by changes in project scope or timeline — managers can turn to a single source of truth to determine the options they have internally. If no one with the skills or talent required for a project is available internally, that is when it’s reasonable to look outside of the organization for help.

5. MONITOR AND REDUCE NON-BILLABLE HOURS

Tracking billable hours is key to improving utilization, but the hours being spent on non-billable work cannot be ignored. These need to be tracked diligently as well so they can be analyzed and optimized. Start by identifying a handful of non-billable activities your resources spend time on — for example, new business efforts, marketing, or administrative tasks— and track those hours at a detailed level so you can easily see the distribution of time and trends. The goal is to reduce this type of work where appropriate so resources have ample time to spend on billable work. Find inefficiencies – like the amount it takes to provide time and expense submissions – and look for ways to streamline those tasks. This allows resources to focus on value-added activities that advance your utilization, revenue, and margin goals.

The Kantata Professional Services Cloud is proven to help businesses measure and improve their billable utilization, driving profitability and predictability. To hear directly from customers on how Kantata has helped them increase their billable utilization rates, check out these success stories:

• TeleTracking Increases Billable Utilization by 37% with Kantata
• CORE Business Technologies Increases Billable Utilization by 35% with Kantata
• Kantata Helps ERP Consulting Group The Answer Company Increase Resource Utilization by 11%

When using a solution like Kantata for resource management, business leaders can be confident that the billable utilization metrics and trends they monitor are accurate — which means key business decisions or adjustments can be made before eating into the bottom line.

If you are not currently using a solution like Kantata and need to get a better understanding of the potential for utilization improvement at your business, we have created a brand new Utilization and Revenue Calculator to help businesses like yours understand the revenue implications of change. With helpful insights on average industry performance, this calculator can help you understand how your business can optimize annual services revenue through utilization improvement. If you’d like to learn more about utilization before using the calculator, check out our step-by-step whitepaper, Nine Ways To Improve Resource Utilization in the Next 30, 60 and 90 Days.