Billable utilization - what you need to know`
If you are in the business of selling your expertise, there is a single metric that you can use to measure the pulse of your business, and that’s billable utilization.
Simplistically, billable utilization measures the percentage of your company's time that is being spent on billable client work.
If this number is high then you're in business, if it significantly drops for any sustained period of time, you’re going to be thinking about redundancies.
First, a bit of history
If you’ve been reading-up on how to calculate utilization, you’re likely to come across some conflicting advice.
Historically, the recommendation was to calculate the number of working hours as 2080, and then divide that by the number of hours worked. Why? 2080 is (for the US) the average number of hours a person is available to work each year (52 weeks x 40 hours per week). Others cite 2,000 hours as the recommended number (allowing for two weeks of holiday).
These ‘fixed numbers’ do have an advantage of being ‘easy’ to calculate and easy to benchmark, but they can also lead to an overly simplistic measurement.
Firstly, few people actually work that many hours (nor should they for that matter if they are doing any sort of creative work!)
Second, different countries have different rules around working hours (France, for example has a 35 hour working week), and businesses differ in their expectation of staff - if you’re a junior in a law firm or undertaking a fellowship in medicine, most weeks will hold well in excess of 80 hours.
Third, people’s contracts are now much less standardized than before, you might be working full-time for half the year, then 4 days a week for a period, or take an extended holiday.
Blanket utilization expectations, which don’t take into account any of this variable also end up having some quite adverse effects i.e. taking a holiday would mean someone’s billable utilization drops, which previously might imply they are failing for going on holiday.
Take utilization metrics with a grain on salt
We flag this because utilization numbers are calculated differently depending on who you're talking to, so take it with a grain of salt from anyone who tells you you need to have an 80% billable utilization, unless you’ve understood how that’s been calculated.
How Runn's calculating utilization
We’ve taken the view that the most useful way to look at billable utilization is simply the hours you have been contracted to work vs. how much you actually have worked on billable work. Periods of time-off are ignored from our calculations (the expectation for being on holiday, is that you are not working), everything else is counted.
We then break time down into two broad classifications:
- Time spent on billable activities (where you are doing billable work, for clients),
- Time spent on non billable activities (internal projects, training etc).
So what should you be targeting for your billable utilization number?
A good utilization number should be one which enables you to run the company in a profitable way. But how profitable you should be aiming to be is largely a function of the stage of growth you're at, and how fast you're growing.
But as a very general recommendation, we’d suggest you aim to maintain an average of around 70% across the entire company.
Getting that 70% utilization level across the company, means some roles are near 100% billable, while some are 0%. To that end, you need to look at utilization in the context of roles and the expectation that comes with seniority.
- Roles. There are a number of roles, which don’t have any billable expectations, for example those in management, administration or sales centric roles.
- Levels of Seniority. Junior staff will generally have higher billable utilization expectations than senior staff. This is because senior staff end up doing a bunch of non-billable work such as mentoring more junior staff, strategic planning and other activities that you generally can’t charge for.
Where utilization metrics can mislead
Obviously, you’ll want to strive for a high percentage of billable utilization as that’s where the revenue is coming from. But watch-out!
High billable utilization does not necessarily equal high profits.
For example, if a fixed price project is going way over budget, the time will still be ‘billable’, but the effective hourly rate you’re earning might be below your costs!
In this example you earned "$40,000", but because the project went hugely over budget, you only made a 2% margin.
A good north star metric
While a profitability report is a better way to keep tabs on this stuff, utilization reports still have their place as generally they don’t represent any sensitive data, meaning they can be widely shared throughout the organization, providing an easy north star metric for everyone to remain focused on.