Employee utilization is not one dimensional. Too often it is used to put decision making on autopilot — resist this urge. It will lead to misguided decisions, and employees will be reluctant to provide you data. The goal of analyzing employee utilization is to get a true perspective of work. This requires a multi-dimensional view of employee utilization. Analytics should help you think in new ways, not replace thinking.
Multiple Employee Utilization Rates.
Calculating employee utilization starts by collecting data: on work, travel, holidays, time-off, bench time, and more — learn more. This information creates employee utilization rates that reflect reality, and allows for multiple views of employee utilization. There are 4 most common views of employee utilization.
1. Full Utilization. Not all time is billable, but that doesn’t mean it isn’t valuable. Full utilization measures the time employees spend working on useful projects and tasks.
To calculate full utilization, in the numerator, include all time employees spent on internal and external projects, include both billable and nonbillable time, and remove bench time. In the denominator should be all available hours, minus holidays and time-off.
Full utilization is useful for identifying inefficiencies in your agency. It will tell you what percent of time is spent not working — either on internal or external projects doing billable, or nonbillable work. It is a measure of waste. There will always be some wasted time. However, you should know how much time is being lost and work reduce what you can. You don’t want to hinder creativity, but you can’t afford needless waste.
Low full utilization rates can indicate trouble with the creative process:
2. Billable Utilization. As an agency you sell an inventory of hours and skills. Billable utilization measure how much of that inventory is spent on billable activities.
To calculate billable utilization the only include billable hours in the numerator. In the denominator should be all available hours, minus holidays and time-off.
Comparing the billable utilization between Juniors and Seniors is useful for identifying under-delegation. Under-delegation is when Seniors do work that Juniors are capable of doing. Under-delegation leads to lower profits. Juniors provide leverage. They free Seniors to do work they are uniquely qualified to do: business development, recruiting, and training. Also, they are both talented and less expensive. Juniors are specialists that are great at a narrow field. However, on a team they allow for high profit margins on both fixed bid, and time and materials projects. Clients typically don’t like paying Senior rates for something Juniors can do — even though you pay Seniors more per hour.
Full utilization rates should be high for both Juniors and Seniors, however seniors should have lower billable utilization rates. A spike in billable utilization rates for Seniors might indicate under-delegation, or you might need more Juniors.
3. Chargeable Utilization. Not all time that is “billable” can be charged to clients. Sometimes a project requires rework, hours have to be scrubbed, or an invoice becomes uncollectible. Good financial management requires keeping an eye on both billable utilization and chargeable utilization.
Chargeable utilization is the amount of available time that can be invoiced to clients. While it is more accurate than billable utilization it is not as useful, because it has to be time delayed. You don’t know immediately know what billable time is chargeable.
You should still calculate your chargeable utilization at least once a quarter. This will allow you to establish — on average — the percent of billable hours that are chargeable. This is a powerful adjustment if you are using billable margin to forecast gross profit.
To calculate your chargeable utilization, in the numerator, you will want to include hours that have been invoiced. The denominator should be calculated the same as the calculation for billable utilization with one exception — all available hours, minus planned un-invoiced billable hours for active projects the haven’t been invoiced, holidays, and time-off. This allows you to compare billable and chargeable utilization rates, and control for active projects. Without controlling for active projects, your chargeable utilization rate will be much lower than it should be.
I recommend doing this same calculation with hours and dollars. Helps to control for projects where you can invoice for all billable hours, but you adjust the billable rate. I have talked to a lot of agency owners that set their rates at $250 an hour, with blended billable rates at more like $125 an hour. They feel good now, but in for trouble when they realize the financial reality.
If you have a reputation for completing projects quickly and commanding premium rates — you might be the best. However, a large difference between chargeable and billable utilization can indicate a problem with how you bid projects. Your ego might be getting the better of you.
In the short run, you can remember the difference between fiction and reality. The danger is in the long run, when you tell your clients that you can do a project in 10 hours for $250 an hour, but in reality the project took you 20 hours at $125 an hour. You risk making decisions as if you bill $250 an hour. You start believing your own legend. This can lead you to over paying for labor, supplies, overhead. It is best to adjust your billable rates and bids to reflect reality.
4. Unrealized Utilization. The creative process is inefficient. The goal of this metric isn’t to make it as efficient as possible — we don’t want to crush the creative spirit. The goal is to identify inefficiencies outside of the creative process — bench time. We want to maximize profits, without minimizing creativity.
Bench time is a result of failure from business development, hiring, or project management.
To calculate start by isolating bench time. Two methods to do this. Method one, if you track bench time, isolate bench time in the numerator. Method two, if you log bench time you will have to work backwards into it. An estimate of bench time is equal to total hours logged (billable and nonbillable) minus weekly billable hours less time-off.
Employee Utilization Trends.
What should you do when your employee utilization rates changes? Are the changes normal, temporary, unique to your business, or something to get worried about? It all depends on the shape of the trend.
1. Seasonal Patterns. People’s behavior can be driven by budget cycles, school schedules, holidays, and even the weather. These changes can affect employee utilization through increased bench time, and delayed client response times.
Seasonal patterns happen year over year. This is what sets them apart from business cycles that happen over 2 more years. To detect seasonality graph the week to week % change for multiple years. Patterns that repeat year over year indicate seasonality. % change equal the current week minus previous week divided by previous week.
Seasonality allows you to measure performance relative to seasonal variation. It allow you to go beyond week to week improvement, to understanding how you are improving year over year. It allows you to determine in week to week decrease in employee utilization is due to employee performance or seasonality. If decreases happen during historically low periods, you will want to encourage
Adjusting for seasonality allows you to measure performance relative to seasonal variation. It allows you to go beyond just making sure that you are improving week to week, but that you are improving year over year. If there is a decrease in employee utilization, the first thing I would look for is seasonality. If the dips are in historically low periods,
Seasonality also can help you plan labor requirements. Encourage your employees to take time-off during historically low periods of employee utilization. Communicating this with your employees can reduce your bench time utilization.
Seasonal fluctuations in employee utilization are neither good or bad — just the nature of your business. The key is to become familiar with your seasonality so you can plan for it. You will never over come it, but you will be able to limit it’s negative effects and take advantage of it’s positive effects.
2. Business Cycles. Businesses go through cycles of expansion and contraction. When expanding businesses invest for a better future. When contracting businesses hold off on new investments, and focus on realizing returns on previous investments. Expansions and contractions can be driven by sales, over investment, or just changes in attitudes.
The impacts of business cycles vary by industry, geography, and company. Knowing how business cycles impact your business will help you prepare. You need to investigate. Your business might lead or follow a recession. Sales might decrease before or after the economy officially enters recession. Your business might have an inverse relationship with the economy — people buy more of your service when they buy less of other services. An example of a counter cyclical business is Contemporary Analysis. People want to find new ways of doing things when they are less confident in the future.
On average from 1980 to 2009 the average contraction lasted 11.2 months, while the average expansion latest 71 months — almost 6 years.
To investigate how your business is impacted by recessions compare whether your sales decreased or increased during periods of recession. Use the data published by the National Bureau of Economic Research on business cycles. I would recommend using % changes from month to month for sales. This will provide you with an understanding
3. Occasional Spikes. Not all increases and decreases in employee utilization follow repeatable patterns — i.e. seasonality and business cycles. Sometimes their are random increases and decreases. This typically indicates an opportunity to make your business more efficient. Positive changes might help you discover new best practices, and negative changes might be opportunities to eliminate waste. Identify an increase or decrease and then investigate what happened during that day, week, month or quarter. This will help you uncover new ways to improve your business.
Note that smaller teams will have more variation than larger teams. On smaller teams, Seniors have to switch between selling projects, scrambling to complete them, and then getting back to sales once projects are finished. This leads to ups and downs for the entire team. At larger firms Seniors are more focused on business development, recruiting, and training. They only spend enough time on billable projects to keep their skills sharp, and earning the respect of their peers and Juniors.
4. Peer-to-peer Average Utilization.
After a year of tracking employee utilization, you will want to compare your average employee utilization against other agencies. The following are some industry average billable utilization rates:
While this can be useful, the best approach is compare your agency directly to other agencies of similar size — a peer-to-peer review. Industry publications don’t provide the level of detail, or control that a peer-to-peer comparison provides.
To conduct a peer-to-peer comparison you will want to work with 1 to 3 other agencies that you do not compete against, but are of a similar size and focus. It might be a good idea to join a Mastermind Group. A Mastermind Group is a peer advisory group with a facilitator that get together on a regular basis to learn from one another. In addition to peer-to-peer comparison, mastermind groups also provide accountability, brainstorming, and education.
Employee Utilization Patterns.
The different patterns you find can help you identify the root cause of a decrease in employee utilization.
In conclusion, metrics are useful when they provide you a multi-dimensional view. When properly used they help us challenge our intuition, bias and groupthink. You should not use employee utilization rates to automate decisions, but instead challenge your thinking.
Knowing your employee utilization rates will help you run a better agency. You make money selling your employees time and skills. Make sure you are making the most of this precious inventory. Know what is being demanded of every team member.
We created Bric to increase the utilization rates of professional service employees through more accurate project planning and time tracking. With our system you can automatically calculate your utilization rates so that you and your team can get back to the work you love.