Calculating Utilization: European Perspective

Last week at the Technology Services Europe conference, I had the chance to speak with a gentleman responsible for global PS within a large European based product company. In our 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 made he strongly disagrees with.

In the original post, I provided definitions for the key terms surrounding utilization:

Total Available Hours: Standard number of working hours available during a time period before vacations, holidays, or personal time off.

Billable Utilization Rate: Total number of hours billed during the period / total available hours for the period

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

I then outlined four practices TPSA recommends regarding utilization calculation practices:

  • #1. Create common baseline number across all geographies
  • #2. Create common categories for tracking staff activities
  • #3. Set billable utilization threshold per geography
  • #4. Track productive utilization

Finally, I recommended embedded PS organizations 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. So what did my new European based acquaintance take exception to? The recommendation to baseline line all geographies and countries on 2080 available hours . As a reminder, here is the rationale from the original posting:

“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. 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. “

This approach leads to utilization tracking as shown in the image below:

Calculating Utilization: TPSA Approach

Calculating Utilization: TPSA Approach

My new friend made the very fair argument that it is easier to give all PS managers, in all countries, a consistent billable utilization rate target. For example, every country managers must keep their resources billable 70% of their available time. This approach leads to utilization tracking as shown in the image below:

Calculating Utilization: Alternate Approach

Calculating Utilization: Alternate Approach

 The clear benefit of this second approach is that every manager feels they are being held to the same standard. And I agree this approach works well, if senior management is reverse engineering the “absolute” billable utilization of every region, based on a common baseline number. If this one step of reverse engineering is not part of the business reporting process, companies can lose sight of the apples to apples productivity of each region. In the above table, if every region hits their 70% target, it feels as if all regions are making the same financial contribution to the company—but they are not. When we add in typical the billable rates achieved in each region for just one position (based on TPSA market rate data),  and multiply billable hours by average bill rate, we see there is a significant disparity in the financial contribution from each region just from this one position:

Calculating Utilization: Financial Impact

Calculating Utilization: Financial Impact

 I absolutely understand the benefit of managing all regions to one standard target utilization rate. However, in a world of global delivery models, I strongly believe the economics of each PS region needs to be calculated and considered when deciding where to grow and who to reward.

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5 Responses to “Calculating Utilization: European Perspective”

  1. Jen H Says:

    Can anyone provide an industry standard definition of a dedicated resource? We offer customers the option to purchase a dedicated resource in monthly increments, but I would like to know from a utilization perspective, what the industry standard definition/expectation is around someone who is “dedicated” to a customer – given they still have a certain level of responsibility within their own organization to attend to while being dedicated to a customer. This of course utimately affects the pricing model for that resource based on the hourly commitment to the customer. Any insights/thoughts would be greatly appreciated!

  2. Victor. A. Griffiths Says:

    Dear Thomas,
    I read your article on “Calculating Utilization: European Perspective”, this is assuming that employees are working on one project only. But in my engineering consultancy firm we work on multiple projects. With this scenario, I request how can the PM calculate the billable utilization rate for his project. We work 48 hours a week. An employees may be booking hours on more than one project, which can be got from the timesheet system. But what would be his available hours. It cannot be 48 hours as this is not for one project only, but may be for more than one project.

    In cases like this how can we calculate his available hours. Can we assume that if the PM 1 has planned 30 hours and PM 2 has planned 18 hours for the employee, then his available hours for PM1 is 30hours and available hours for PM2 is 18 hours. Is this the right way.

    Request you to kindly help me in the above matter.

    Regards,
    Victor.A.Griffiths

  3. Thomas Lah Says:

    Victor:

    I think the key nuance here is individual utilization vs. project level utilization.

    First of all, the outline I provide on calculating utilization is not assuming the consultant is working on only one project. However, the perspective is focused on how to calculate overall utilization for the individual consultant or group of consultants. Your challenge is how to calculate billable utilization for a specific project.

    When calculating project utilization, I don’t believe “available” hours is the right concept to apply. I see PS organizations focus on planned vs. actual hours. So, in your example, how many hours were planned for project 1 vs. project 2, and how many hours were actually billed to those projects. This would provide the critical metric of “planned” vs. “realized” billable hours for each project. The key concern at the project level is “unbilled hours.” These are hours that consultants apply to the project but you are not able to bill the customer for the effort.
    In addition to tracking this project level metric, you would still track the overall billable utilization of each delivery consultant to make sure they are profitably engaged at an individual level.

    Does this distinction help? Is this what you are trying to reconcile?

  4. David Says:

    I am trying to determine utilization for a production team and when we run the numbers by individual technician they are lower than if we pool the entire team. My feeling is that it should be looked at individually to see where the low spots are and adjust the workload accordingly. My counterparts want to calculate the team average because they want to add headcount. Another dissagreement we have is that they only calculate using 85% of the total working hours because they say that 15% of the time is administrative time. I think that it should be calculated using 100% of the available hours and that the utilization should be 85%. Only using 85% of the available hours will always put them over the top. Am i going crazy? what would be the proper way to calculate it?

    Thanks

  5. Anatomy of a TSIA Member Inquiry (on … what else? … Billable Utilization) « Says:

    […] Thomas Lah and I have each written numerous blog posts on this topic including:  here, here, here, here, here, here, and here.  […]

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