How a 3% Utilization Gain Translates into Millions in Margin

Imagine your CEO or CFO walking away from millions in revenue. Surely that would have to be some kind of outrageous mistake?

Yet that’s exactly what's happening when professional services firms fail to optimize resource utilization rates. Every underused hour is money left on the table.

In this article, we’ll break down exactly how better utilization translates directly into higher revenue and profitability.

Use these calucations to win over senior leaders who may not see the monetary value of resource management – yet!

How do resource utilization rates impact revenue generation and profitability?

Resource utilization impacts revenue and profit both directly and indirectly. It not only improves the return on your investment in staff salaries, it also increases your capacity for client projects, reduces recruitment overheads, and keeps headcount under control. 

Direct impact of utilization rates on revenue and profit

Employee utilization rates are concerned with how effectively you use your team’s time.

Salaries are a fixed cost, but the revenue they generate depends on how much billable work they do.

• If employees are underutilized, you pay the same salaries but get less revenue, which hurts profitability as well as operational performance.
• If they are optimally utilized, their work generates more revenue than they cost, increasing project profitability.
• If they are overutilized, revenue may rise in the short term, but burnout and turnover increase costs, reducing profit in the long run.
  

Put simply, better utilization rates means more revenue from the same costs, which boosts profitability.

As we like to say here at Runn, utilization is about ensuring that neither time nor talent goes to waste. But when you under-utilize resources, you’re burning money instead of earning it. 

Not only that, but higher utilization increases productivity, project velocity, and throughput. This means you can take on more client projects and revenue-generating activities.

Indirect impact of resource utilization rates on revenue and profit

Resource utilization rates also indirectly impacts on revenue and profitability.

For example:

• Balancing workloads, preventing burnout, and reducing the costs of involuntary turnover.
• Doing more with existing staff, reducing unnecessary increases to headcount.
• Improving workforce planning and reducing reliance on contractors.

How to calculate utilization rates

The formula to calculate resource utilization is: (Hours worked / Total available hours) x 100

The billable utilization rate formula is: (Billable hours worked / Total available hours) x 100

Creating optimal utilization rates

Creating optimal utilization rates is a delicate balancing act. It’s not as simple as maximizing utilization by targeting a 100% utilization rate.

That may increase productivity and profits short-term, but long-term it is a costly strategy. 

Ideally you should be aiming for 80% resource utilization and – within that – 80% billable utilization. This balances revenue and profit realization, with people-centric policies and cost control. However, you should consult industry benchmarks, as this may vary by sector.  

The dollar value of optimal resource utilization rates 

The Resource Management Institute calculates that a modest 1-point increase in utilization rates drives over a million dollars in additional revenue in a 300-person professional services organizations.

Let’s look at a couple of examples of how improving billable utilization rates can boost project-based organizations’ profits. 

Example 1

• Imagine a 300-person consulting firm where the average billable rate is $200 per hour.
• Each consultant works 1,800 billable hours a year.
• At 72% utilization, the firm bills 388,800 hours, generating $77.8M in revenue.
• If utilization improves by just 3 percentage points to 75%, the firm bills 405,000 hours.
• That’s $81M in revenue – a gain of $3.2M without hiring a single extra person.
  

Example 2

• A digital agency with 100 billable staff charges $150 per hour.
• Each employee works 1,600 billable hours per year.
• At 68% utilization, the agency bills 108,800 hours, earning $16.3M in revenue.
• By improving utilization to 72% – just 4 percentage points – the agency bills 115,200 hours.
• That’s $17.3M in revenue, an extra $960,000 by managing capacity more effectively.
  

Now tell us that calculating and improving resource utilization rates isn’t a priority for your C-suite! 

What could you unlock?

When even a small improvement in resource utilization can translate into millions of dollars in additional revenue, resource management software is a savvy investment. 

Runn empowers professional services organizations to monitor, manage, and improve billable utilization – this can enhance productivity, project throughput, and profitability.

There are a range of tools you can use to improve resource utilization (of course, we will always vouch for Runn, because we're proud of the tool we've built!). Take a look at the leading solutions on the market ➡️