When business slows, PS organizations begin scrutinizing billable utilization with renewed vigor. PS management is under increased pressure to justify both billable utilization rates and how non-billable time is being spent. Clearly, the concept of utilization is one of the key building blocks of any profitable professional services organization and billable utilization is a key indicator of staff productivity. However, professionals in the industry continue to debate the appropriate way to calculate and report this fundamental metric. What number should be used when determining the total available hours for each consultant? Should the total available hours be modified from country to country to accommodate variances in holidays, vacation, and work week policies? If there is no standard way to calculate utilization, how can geographies compare productivity?
As an industry association, TPSA will never completely put to rest the debate surrounding utilization calculation. However, TPSA does provide a recommend practice for the most effective way to calculate utilization across multiple geographies.
First of all, we need to provide the key definitions that are used when calculating and discussing the concept of utilization:
TotalAvailable Hours
Standard number of working hours available during a time period before vacations, holidays, or personal time off.
What baseline number should be used here is the greatest source of debate regarding calculating utilization? The most prevalent number used in the industry for total available hours available in a year is 2080. This number is calculated by taking the 52 weeks of the year and multiplying them by a standard forty hour work week. The next most standard number adopted by companies is 2000. However, some TPSA members do establish a unique number of available hours number for each country.
Billable Utilization Rate
Total number of hours billed during the period / total available hours for the period
Once a company agrees on the denominator of available hours, it should be relatively easy to calculate billable utilization rate—providing the company accurately records billable hours for each consultant. The challenge with this calculation concerns customer activity that is billed vs. unbilled. For example, if a consultant performs work for a customer but is not able to charge the customer for that time, it should not be added to the numerator of this calculation.
Productive Utilization Rate
Total number of hours billed + total number of unbilled customer project hours + total number of hours allocated to approved projects + total number of hours in training/ total available hours
Just because a delivery consultant does not bill an hour does not mean the time was misspent. Productive utilization rate tracks the percentage of time the consultant spends on approved initiatives and activities that do have value to the company.
Now that we have a common set of terms, I will outline four practices TPSA recommends regarding utilization calculation practices:
#1. Create common baseline number across all geographies
By basing all utilization calculations throughout the world on a common denominator, it becomes exponentially easier for the management team to easily understand the differences in geographic performance. Also, by establishing a common denominator, all finance and service operations staff will benefit from using the same exact process to calculate billable utilization. As previously mentioned in this article, the most common number in the industry to use for available hours is 2080.
TPSA acknowledges that some organizations, based on geographic location of billable resources, seniority of consulting staff, etc, will never have 2080 billable hours available. For these organizations, the achievable target billable utilization rates will be lower by definition. Understanding the realistic achievable billable utilization target for your PS organization is an important step in modeling the business.
#2. Create common categories
Secondly, TPSA recommends the PS organization establishes common categories for delivery consultants to track their time. Recommended categories for delivery staff to track their time include:
- Billable Time : Hours tracked against a customer project and billed to an external customer. Non-billable Customer Project: This would be activity performed for a customer but not billed. It is critical the PS organization tracks and quantifies this “sales cost offset” activity to ascertain the financial impact of such activity on PS financial performance and company financial performance.
- Training and Certification: Hours spent attending formal skills development training.
- Internal Project: Hours spent on approved internal projects such as solution development or product enhancement/fixing. Even if there is cost relief from another department for the use of the PS resource. The hours should be tracked in this category. The PS management team must understand how much time delivery staff our spending with customers as opposed to supporting internal initiatives.
- Holiday: Hours off for company holidays.
- Vacation: Hours off for personal vacation accrued.Other: Any hours spent that cannot be categorized in one of the five previous categories.
#3 Set billable utilization threshold per geography
TPSA recommends global PS organizations do establish specific billable utilization targets on a country or regional basis. This acknowledges the reality that economic and cultural variances will impact achievable billable utilization.
#4. Track productive utilization
Finally, TPSA recommends embedded PS organizations that support a product portfolio track both billable utilization rate and productive utilization rate. This comparison is critical during periods of new product release when billable utilization may fall due to support activities surrounding product rollout. However, productive utilization rate, if tracked, may actually spike higher as delivery staff find themselves working overtime to support a large product push.
Example: Calculating Utilization
All of the concepts listed in this section are brought together in the image for this entry: Utilization Targets by Geography. In this table, you can see that the U.S., Germany, and Japan have each been given different billable utilization targets. Also, Germany is modeled to experience higher holiday and vacation time while Japan is modeled to experience a greater amount of hours spent on non-billable customer project activities.
Calculating Utilization
Once again, TPSA will never remove all of the debate surrounding how billable utilization is calculated. However, by following these recommended practices, PS management can present a consistent methodology to help executive management understand billable utilization dynamics across multiple geographies.
Tags: billable utilization
December 3, 2008 at 5:15 pm |
Hi Tom,
This is a very informative post. This helps clarify best approaches to utilization. Can you share a few suggestions on capturing gross margin when dealing with full time salaried employees? Most systems compare hours to complete (labor costs) to revenue collected. Calculating the hourly cost of salaried employees based on a 2000 hour work year is obvious. The challenge is hourly rates can be quickly diluted when the employees work longer then 40 hour work weeks. For example the gross margin on a project that takes 100 hours to complete varies drastically if the labor was performed in one vs. two weeks for a salaried employee. Any insight or direction is greatly appreciated?
December 3, 2008 at 8:18 pm |
Jerry:
I don’t think I clearly understand the question.
Project margin = Project Revenue – Project Costs.
If project revenue = $20,000 and it takes 100 hours to deliver the project at a cost of $100 per hour, than the project cost would be $10,000 and project margin would be $10,000. Regardless if the 100 hours were applied over one or two weeks.
Is the problem that your project accounting not allow you to match actual effort to project revenues? Or is there something else you are struggling with?
December 4, 2008 at 10:32 am |
I’m struggling with the true cost per hour (this example $100). To get an hourly cost we plan on taking employees annual salaries and multiplying them times 122% (includes burden) and dividing by 2080. But if an employee worked and logged 60 hours in a week on a project and assuming you are not paying him over time you are still paying him the same as if he worked a 40 hour week. Granted the scenario hopefully will not occur too often and it probably balances out over time. But this particular project’s margin may be under stated by 20 hours x $100 if your true cost of the project was one week of work (40 hours). I hope this helps clarify. I was just curious if this concern has come up in the past. Thank you for sharing your ideas.
December 4, 2008 at 2:28 pm |
Let’s say the employee cost (fully burdened) is $100,000 for the year. Divided by 2080, the hourly cost is $48.
If an employee does 60 hours of work against a project, I would charge that project with $2,880 in cost (60 * $48). Even if you only paid them $1,920 (40*$48). This addresses several issues:
1. Allows you to understand the true cost and true effort associated with a project.
2. For billable hours, allows you to reconcile costs and effort with customer revenues.
If any of the readers out there have an opinion on this, please chime in!
December 15, 2008 at 3:41 pm |
[...] Muccio Thomas Lah, author of the Service Visions blog, was just telling me that his recent post on calculating utilization has been one of the more heavily read posts he’s ever written. This should come as a [...]
January 28, 2009 at 12:48 pm |
My struggle is with calculating a billable utilization rate in cases where work performed that was initially assumed to be billable is later waived/treated as non-billable. Do you have any suggestions for how to capture billable vs. non-billable hours for projects where business decisions might retroactively move hours from the billable “bucket” into the non-billable one (or vice-versa)?
Thanks.
January 28, 2009 at 2:08 pm |
Pam:
I understand the challenge. I recommend customer work that initially was scoped to be billable and then was performed for no fee should be categorized as “Non-billable Productive” in the sub-category of “unbilled customer project.” This approach accomplishes several objectives:
-Keeps your true billable utilization calculation clean. In other words, you need to understand what percentage of time is truly revenue generating.
-Provides a place your consultants can use to get credit for doing productive customer work. However, make sure they are assigning this unbilled time to a specific and valid customer project so you can track what customer projects are accumulating excessive unbilled hours.
-Provides a way for you to start analyzing how big this problem is by tracking the amount of hours that are unbilled yet project related. If the bucket is big, you can justify an effort to analyze and address root causes. Poor project scoping? Sales folks promising too much? Product issues that require services staff to perform work for free.
February 4, 2009 at 10:36 am |
Thanks, Tom.
I guess more specifically my problem is in situations where time is already explicitly booked into our time tracking system (and reported on) as “billable.” After the monthly billable utilization numbers are published, some event occurs and those hours are now deemed to be unbillable. Do I recreate the previous month’s utilization figure and rebook the time to the “unbillable” (but productive) bucket? This seems like it has potential to become unwieldy and to cause the restatement of every month’s billable utilization ever reported.
February 4, 2009 at 6:14 pm |
Pam:
I agree, going back and rebucketing can be painful. I would recommend when billable hours are “debooked” because the customer does not agree to pay for the work, you create a new category called “write offs” to track these hours and the dollar amount. At the end of the quarter, when everyone hits their billable utilization target but the “write off” number makes the quarter less profitable, you will be able to show the correlation. Also, you could attach thresholds on your bonus payouts for the PS staff. They must hit their target utilization rates AND be under a threshold for hours in the “write off” category before payouts kick in.
March 18, 2009 at 12:42 pm |
I enjoyed your article. I have a question about whether or not admin hours should be included in “Productive Utilization”. In your definition the productive utilization rate does not include admin hours in the calculations. However, in your graph it implies that productive utilization includes admin hours (based on the green bar). Can you clarify whether or not admin hours go into productive utilization, and if so why?
In my mind, admin hours are essentially an “other” bucket, and I don’t feel it makes sense to include it in the productive utilization rate calculations. If you include “admin/other” hours in the productive utilization rate then the metric becomes less meaningful. Perhaps your definition of admin hours is different. Any clarification you can provide would be helpful.
March 23, 2009 at 3:54 pm |
Brent:
I agree with your comment. I would not classify admin time as productive utilization. The graph is not labeled correctly. Great catch.
April 6, 2009 at 3:01 pm |
[...] conversation on the challenges of managing embedded PS, he made the comment he had read my post on Calculating Utilization—and he wasn’t so happy. He liked portions of the guidance, but there is one recommendation I [...]
April 12, 2009 at 10:15 am |
Thomas!
.
This is very thorough guidance. I liked it.
The next step would be guiding the consultants to deliver to this utilization target. I am consultant myself and know about utilization first hand
What I observed in the field working with other consultants that many struggle to hit utilization target consistently. So i “developed” a simple system of “budgeting” my utilization hours for projects annually, monthly, weekly and then executing to the plan daily. It worked for me pretty good. I am not overwhelmed with work but still capable to hit my target and much beyond it. Would love to hear what you think about it
http://practicethis.com/2008/09/06/time-is-not-money-time-is-budget/
Thank you.
August 20, 2009 at 10:28 am |
If I want to calculate billable utilization each month, how would I handle vacation time? For example, I have 2 employees. Each employee is expected to work 20 days this month (5 days x 4 weeks). Let’s assume that the first employee takes two weeks vacation and the second employee doesn’t take vacation during this time. When I do the billable utilization using the formula you described above for the month, I would be surprised to see that the first employee had a very low utilization (because of the 2 weeks of non-billable time) compared to the second employee (assuming this person was doing billable work during that time).
September 29, 2009 at 1:19 pm |
We faced the same issue in developing our model, and I think there are generally 2 approaches:
1. Report actual utilization, and know that everyone will have “low utilization” months whenever they take vacations. It will happen to everyone, and the aggregated annual utilization numbers will average that out.
2. Subtract any vacation from the denominator, so that someone that worked 100% for 4 weeks would show the same as someone who worked 100% for 2 weeks. Essentially, both were 100% for the time that they had available. In this model, the annual targets need to be adjusted for allowed vacation time (i.e. reduce the denominator by that amount). The upside to this approach is that you can see comparative utilization levels across your tem. The downside is that you can’t compare your utilization levels with industry standard levels, which use 2080 (or similar) as the denominator.
We use method #2, and find that it works quite well, but we do suffer from the downside that I mentioned, although we can re-calculate our levels to be able to compare them to industry averages.
Hope this helps.
September 2, 2009 at 3:36 pm |
[...] the most popular blog entry I’ve written to date is the one that defines a standard method for calculating utilization for delivery staff. It has generated several comments and questions—a majority made directly to [...]