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:
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:
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:
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.