Experienced consultants know that utilization is the metric that matters most. It’s an indicator of your productivity, your ability to generate revenue, and often a driver of your bonus. So if it’s that important, you want to be sure that your organization understands how to calculate utilization the right way, and that you have systems that enable you to easily capture and report on the relevant data.
When customers ask me how they should calculate resource utilization, the first question I ask is, “are you looking for historical metrics, or forecasting metrics?” For today we’ll focus on historical utilization.
Calculating historical utilization is a business problem with a lot of math in the background. First the business issues. The key questions that Services firms want to answer are:
- Who is billing the most?
- Who is the busiest on billable and other strategic projects (business development, intellectual property development, etc.)?
Now for the math part (warning ! – numerator and denominator up ahead). Let’s assume all your projects are billed as time and materials work, not fixed fee work. You first need to figure out what you want to consider as valued work – is it just billable work? What about non-billable client facing work? What about helping out your sales team to win a deal? Once you figure out your criteria for valued work, you have your numerator.
Since resource utilization is a percentage, you need to figure out what your denominator should be. It might be a 40 hour work week and 52 weeks a year (the “2080” denominator). Some organizations expect 45 hours per week while others are at 37.5. What about vacation – should that be taken out of the denominator? What about holidays? If you want your team to pursue 40 hours per year of consultant development, should that come out of the denominator too?
There is no one right answer. And if you don’t understand the metrics you could get caught drawing some incorrect conclusions. But there are some guidelines from successful companies that you should consider:
- Define your metric well and communicate it clearly. You need your consultants to see no mystery in utilization calculations.
- Simple is better – the “2080” denominator is my favorite because it reduces much of the confusion. Even if you have European operations with a shorter work week, or part-time employees, allow them to have lower target percentages rather than a lower denominator. Otherwise you’ll start to doubt your own metrics if you lose control of understanding the math.
- Don’t measure too short a period – if you expect consistent monthly utilization by individual, you are mandating that your staff never take vacation. This is not sustainable, of course
- Define utilization such that you can measure the metrics – if you want to give credit for “Business Development”, make sure your consultants are tracking that data in their timesheets. You’ll have no good utilization metrics without the right timesheet data.
- You might need more than one utilization metric. Track “Billable Utilization” separate from “Productive Utilization (including non-billable work)”. Trying to jam all your business insight into one metric might not be wise.
- Beware of benchmark data. There’s GREAT research out there on utilization metrics from other firms. The research is solid. But make sure you’re comparing apples-to-apples when looking at your utilization metrics vs. the metrics of others.
Services Managers love debating utilization. Though it is not a perfect metric, it is an important metric for driving employee behavior and measuring effectiveness. So embrace the data, but make sure you consider the math before jumping to conclusions.