The Ongoing Debate: Calculating Utilization

The debate on calculating billable utilization continues. Here is the most recent comment posted on Service Visions:

Thomas:

When reading your article, i was – just like Craig – puzzled by the baseline definition: I still do not get the full reasoning behind applying the 2080 available time baseline across regions and the link with global benchmarking. It would seem more reasonable to measure real productivity of staff against their available time (as defined by local work schedules) as a measure of “efficient / billable use of their available time”. This measure can be compared across regions to define where to source “efficient” services. Could you please elaborate more on your reply of Dec 15, 2012?

There is some brutal yet simple math that is relevant to this discussion. Here is a hypothetical example:

I employ two technical consultants. They live in two different countries. I use them both on projects across the globe. I bill them out at the same global rate of $200 an hour. Currently, they both have the same exact billable utilization rate against AVAILABLE hours (as the recent commenter recommend should be used).

However, one of the consultants is billable 2000 hours a year and generates $400,000 for my business. The other consultant, due to local labor laws, has less availability. They are billable for 1800 hours a year and generate $360,000 for my business. The $40,000 differential in profit is not irrelevant to my business. If I have ten consultants producing at this lower profit level, I am now losing $400,000 in incremental revenue.  

Now this math does not take into consideration local labor margins. If the consultant that is only billable 1800 hours a year costs less than the consultant that is billable 2000 hours, the labor margin advantage may make the 1800 hour consultant more profitable for the company. However, it is my experience that the delivery consultants with the lowest amount of available billable hours typically are located in areas with the most expensive labor costs.

To have clear visibility to the true profitability of various labor pools across a global service organization, I recommend service organizations use a common denominator of 2080 when calculating billable utilization.   As the simple example demonstrates, $400,000 and $360,000 are not the same numbers. Even if the consultants are achieving the exact same billable utilization rate against available hours.

If you have a service business that is not global and does not share resources across countries, this debate is less relevant. However, having expensive, low availability delivery resources claim victory by touting a high utilization rate against a low denominator is a false positive if you are attempting to optimize your global delivery costs.

I am sure this will not be the end of the debate regarding “how to calculate utilization.” I hope this post does explain why I recommend using a common 2080 denominator across all geographies in a global service business.

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4 Responses to “The Ongoing Debate: Calculating Utilization”

  1. Joel Says:

    Completely agree with this.

  2. Carl Isenburg Says:

    I’ve been wondering for years: Why do we always abstract back to hours?
    If we know we made $400k on Consultant A, and $360k on Consultant B – can we subtract what we paid each of them to result in the margin or net-value of each consultant? This would have the benefit of incorporating overtime pay, and bonuses, and expenses directly into the calculation.

    It seems that we make it more complicated by calculating in hours.

  3. Dave Says:

    I agree on the sentiment from a financial perspective. But when utilization is reported across the organisation and used as a measure for individual goals, then what is the impact on employee moral and motivation?

    • Thomas Lah Says:

      There is no free lunch here. If you do not use a common denominator, employees living in high availability areas will feel penalized because they know they are working more hours per year. In cases like this, I lean toward financial transparency.

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