Calculating-Employee-Utilization

Your employee utilization rate is the percent of time available for work that an employee works. It is one of the most powerful tools you have to improve your agency. However, it is often misused — creating a culture that rewards long hours instead of quality work.

The problem is over simplification. Using only the basic formula, employee utilization = hours worked / hours available to work, has created a misleading view of work. We need to expand how we think about employee utilization. We need to create a better framework for thinking about, tracking, and calculating employee utilization rates. This article provides an introduction of how to build a more complete view of work.

Setting a Foundation.

Setting a strong foundation will allow you to use employee utilization rates with the least amount of pushback and overhead, while maximizing the benefit. Start by tracking all time, and properly categorizing it. Next, avoid manual calculations; use a system to automatically calculate employee utilization rates. Finally, establish an employee utilization policy that outlines how to track time, how employee utilization rates will be used, and sets utilization targets.

1. What work counts towards utilization?

You should track all work — every hour no matter how it is spent. For freelancers time tracking might only be about invoicing clients. However, for agencies it is about identifying projects that are off-track, identifying ways to increase productivity, improving employee satisfaction, and identifying both under and over performers. You need to keep track of all time, not just what you can bill clients for.

The key is to track different types of time. You need to know what time is billable vs. non-billable; for internal vs. external projects; and what type of time it is: travel, training, coaching, re-work, production, and bench-time. This allows you to analyze how people are spending time to create different views of your employee utilization. Taking this segmented approach will provide you with a more accurate perspective. Learn more about the project management steps.

2. What counts as hours available to work?

Traditionally the hours to work were set at either 2020 or 2080. If an employee took vacation or spent more time traveling they would have a lower utilization rate than someone that stayed in the office. Everyone’s employee utilization rate calculation had the same denominator — this helped create culture of long hours.

It was too taxing on administrators to adjust the denominator for each employee and their vacations, travel time, internal projects, training, etc. Employee were forced between working frantically to keep up, or posting lower employee utilization rates than their co-workers.

Thankfully agencies now have a system — Bric — that allows them to dynamically calculate how many hours someone is available to work. Agencies should still set goals for employees. However, now those goals adjust dynamically to travel time, vacation time, and the demands of the firm. This allows agencies to compare employee utilization rates between teams and employees. It normalizes the metric making it more powerful.

3. What is your employee utilization policy?

Employees need to understand your agencies employee utilization policy. They need guidance on tracking time, the company’s employee utilization goals, how utilization rates are calculated, and what they can do to improve their utilization rate. This will help them align how they work with the goals of the company.

You should add the following information to your Employee Handbook.

  • Guidelines for Tracking Time. Explain what time is billable and nonbillable, how to apply time types, use notes, and what type of work should be tracked. This way everyone is tracking time the same way, instead of using their own personal system.
  • Your Employee Utilization Rate Calculations. Employees know you are tracking time. They should also know how you are using this data. Let them know the different ways that you calculate employee utilization rate. What are the different ways you are slicing the data. I also recommend defining a Primary Utilization Calculation, and as well as a series of Secondary Utilization Calculations.
  • Uses for Employee Utilization Rates. Motivate your employees by letting them know how you are using employee utilization rates. Your employees will be motivated to track time if they know that the data will be used to make future plans more accurate — eliminating bench time and over scheduling. Time tracking isn’t as motivating if it is just for invoicing. 
  • Targets. Let employees know what is expected of them. Set employee utilization targets for individuals, teams and the entire agency. Work back from your Financial Goals. Gross Profit = billable margin * (utilization rate * available hours).

Being able to compare target and actual employee utilization rates allows managers to quickly detect issues. Making quick correction, will help ensure that the agency achieves it financial goals. If people meet their utilization goals the agency will meet its financial goals. If not, something needs to change.

  • Best Practices. You probably want your employees to spend some of their on client relations, team comradery, business development, and coaching/training. Your Employee Utilization Policy should provide guidelines for what you are looking for when analyzing their timesheet. Professionals tend to focus single mindedly on billable time — this is probably not healthy.

Time Tracking

Calculating employee utilization rates starts with collecting and storing data on time. You want to track all time, not just billable time. The following is a discussion about how to use time tracking data to calculate employee utilization rates.

  1. Project Time. You should track time — even on fixed bid projects. This will allow you to conduct postmortems after each project. Postmortems allow you to identify ways to improve productivity, improve future project plans, and determine what types of projects are best for your agency.
    • Analyze productivity by looking for time spent on rework. Reduce rework by improving client communication, and the creative process.
    • Improve future project plans by comparing your project plan to actual hours required to complete the project.
    • Determine the financial success of the project by looking at the real cost and opportunity cost. The real cost is how many dollars you spent on the project. The opportunity cost is how much revenue could have been generated working on another project. Both costs will help you analyze if this project and future projects like this are the best way to utilize your scare resources — hours and skills.
  2. Vacation Time. Seniors tend to have more vacation time than Juniors. They shouldn’t be punished for taking the time-off they have earned. Vacation time should be subtracted from hours available to work. Creative people need time to decompress, and they shouldn’t be punished for taking time-off. Read: Relax! You’ll Be More Productive.
  3. Holidays. During the Holidays, it is too common for employees to have to fit 30 or 40 hours of billable work into a 3 to 4 day workweek. Employees don’t have a choice to take these days off. The company is closed for business. You need to remove this time from hour available to work — the denominator. During the Holidays, it is too common for employees to have to fit 30 or 40 hours of billable work into a 3 to 4 day workweek. 
  4. Travel Time. Employees and teams have to travel — some more than others. They shouldn’t be punished just because travel time can’t be counted as billable hours. Too many consultants spend Friday nights and Sundays traveling so they can start the week on par with the rest of the company. This is okay once and awhile, but not every week. Travel time should either be tracked as non-billable work time, or subtracted from hours available to work.
  5. Agency Building. Success is more than just billing clients: you have to spend time building your agency. Unfortunately, how you calculate your employee utilization rate can discourage people from spending time on internal projects, training, coaching, admin, and management. I recommend using a combined approach. Seniors should have lower set weekly billable hours to make time for management and coaching. All employees should track time spent on internal projects, training and admin.
  6. Business Development. Time invested in business development doesn’t always produce clear returns on investment. With business development you might do something 10 or even 100 times before it produces a results. This complicates how you analyze time spent on business development. I recommend tracking time spent on business development, and not subtracting it from available hours. This way you can isolate it, and analyze business development utilization. This allows you to compare the return on business development. However, understand that business development is as much art as it is a science. Look for activity, but be gentle with critiques.
  7. Bench Time. Bench time is the time employees are not assigned to billable or non-billable projects. It represents lost opportunity for the company. Bench time should be accounted for, and should not be subtracted from hours available. This way you can calculate the opportunity lost by not keeping employees busy.

Three Common Employee Utilization Rates.

Getting an accurate perspective of work, requires looking at employee utilization several different ways. The following are four methods to help you get started.

  1. Full Utilization. Not all time is billable, but that doesn’t mean it isn’t valuable. Full utilization measures time employees spend working on useful projects and tasks. To calculate full utilization, in the numerator, include all time employees spend 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. 
  2. Billable Utilization. Measures time employees spend doing 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. 
  3. Revenue Utilization. Not all time that is “billable”, can be charged to clients. The goal of this calculation is to determine how much time an employee spent on billable work that was actually billed back to a client. I recommend calculating this in both hours and dollars. 

Learn more about Analyzing Employee Utilization.

In Conclusion.

Employee utilization rates are one of the best tools you have to improve your agency. However, it can be misused. If not calculated properly employee utilization rates can put an unhealthy amount of pressure on employees. Overtime employees might be pressured into unethical behavior. You don’t want people lying about how they spend their time to keep up and avoid punishment. The solution is how you calculate employee utilization rates.