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:
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.
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