If you want your professional services business to be profitable, you must track utilization rates. Learn how to do it in our ultimate guide.
It is easy to suffer financial losses if you don't plan time carefully and utilize resources effectively. A good way to monitor how your business is doing is by looking at the utilization rate. But what is an organization's utilization rate, and how and when do you calculate it? What is a reasonable staff utilization rate? Are all rates computed the same way?
In this article, we'll look at how utilization rates are calculated, and why it's key to be able to calculate utilization rates accurately.
Utilization rate is the amount of an employee's work time that benefits the company. It is expressed in percentage form, with 100% equating to the ideal total capacity provided by your workers to earn you a profit. In reality, this 100% utilization rate is actually impossible to obtain. This is because there are many limiting factors you have to consider.
Each person's limiting factor includes holidays, work schedules, and planned leaves. It also includes the total hours spent on other company-related activities that don't yield any profit.
There are different types of utilization rates that are relevant to businesses, from law firms to creative agencies. These include:
This is a measure of how efficiently a machine or component is running. A calculation of a machine utilization rate enables:
For instance, if a machine has a low utilization rate, it means that the machine is idle most of the time. The high idle time could suggest that there are problems with the machine, or that it’s not being used enough by workers. Either way, it could be time to replace or repair the machinery. If machine utilization is not measured, this indicates poor planning and possibly interrupts the delivery of services and incurs costs that could be avoided.
An employee utilization ratio measures how long someone spends on billable work as opposed to non-billable activities such as training and attending meetings. A company must keep track of its employees' time and differentiate between the ways the time is used. Tracking billable and non-billable hours will give information about the effectiveness of your workforce.
Employee resource utilization can relate to billable or non-billable hours.
Billable hours are the hours spent by your team working on income-generating tasks. Most of these assignments are arranged with the client and included in the payment invoice. The implementation of the project, revision requests from clients, and other meetings and discourses are all considered part of the billable hours. Billable utilization is the ACTUAL time consumed to do the project.
Non-billable work, on the other hand, is not requested by the client but is still necessary to keep the business running. Non-billable work includes meeting with the team before a project begins, proposing a project to a new client, and training your team to upskill them. Even though these instances do not generate a direct profit, they still involve staff costs.
An optimal utilization ratio between billable and non-billable hours is often set at 80%. This is also sometimes referred to as the realization rate, representing the proportion of time that is billed to a client.
New to utilization? Check our guides here:
Your utilization rate isn’t a constant. It changes depending on what’s going on in your business. It takes constant monitoring and a steady hand to maintain it at the optimum level. Much like one of those wire buzzer toys, where you guide a rod over a metal frame, trying not to touch the edge. Too far one way and you’re at risk of underutilization. Too far the other and overutilization is the issue.
Here are seven factors that can knock your utilization rate off track - and need careful management.
If you don’t have enough suitably skilled resources, you are at risk of overutilizing the ones you do have. If you see utilization rates spiking above the 85% optimum utilization rate, ask whether resource availability is the issue. It could be a temporary issue you need to manage - for example, someone is off sick. But if it’s a long-term trend, you might need to consider upskilling staff or recruiting more.
It isn’t just the number of resources that’s important - it’s also their skill sets. You might have enough resources, but if they don’t have the skills required to meet demand, they’re not much use. You could end up over-utilizing the resources with in-demand skills, while resources with redundant skills are warming the bench. This is where skills management and upskilling are so important.
Your project schedule determines when different types of resources are required. If you don’t plan the project accurately - or if your forecasts are inaccurate - you could end up with resource issues. This could manifest as having too few resources when needed - leading to a utilization rate increase - or too many resources - which sees the utilization rate plummet.
You’ve planned your project perfectly and allocated just the right resources - your utilization rate should be bang on. But it’s not. What gives? It could be scope creep - where small changes to a project create big problems for the schedule. When your schedule gets skewed, your resources are in the wrong place at the wrong time, which can negatively impact your utilization rate.
This one sometimes slips under the radar. But if you don’t prioritize projects properly, you can end up with poor utilization. A strategic combination of specific projects might have resulted in optimum utilization rates. But because you’re not scenario planning and prioritizing projects, you end up with a random combination that could lead to over- or under-utilization.
When you don’t have your full complement of teammates, utilization rates can spike. Your remaining staff need to pick up the slack if you want to avoid project delays. Ironically, over-utilization can lead to unplanned absences and turnover as burnt-out staff get sick and leave. Keeping utilization rates reasonable is a virtuous circle.
You need to understand demand and resource your business adequately for upcoming projects - known as capacity planning. If you don’t get this right - for example, realising a spike in demand too late to recruit new staff - you could end up over-working your existing resources. Some sectors have seasonal or cyclical fluctuations in resource demand. If you don’t scale up - or scale back - your resourcing to match, you may experience peaks and troughs in utilization rate.
Both under- and over-utilization can spell long-term trouble for your business. Monitoring and maintaining an optimal utilization rate is one way to keep your business on track for high productivity and a sustainable future.
Overutilization negatively impacts performance, productivity, turnover, and your employer brand.
Overutilized employees are more likely to experience burnout, which reduces professional acuity (read: they make more mistakes and don’t think as clearly). Eventually, burnout leads to illness, absenses, and increased staff turnover. Left unchecked, this leads to more pressure on remaining resources, which undermines morale.
Overutlization also leads to quality issues. Not just because people are emotionally exhausted but because they don’t have time to do a great job. They may cut corners to keep up and have a ‘that’ll do’ attitude.
They’re also less likely to be engaged, enthusiastic and innovative. And can you blame them? No one likes to feel unfairly treated or taken advantage of. Over-utilization can stifle creativity - ironically, often from your most valuable employees.
Overutilization also damages your employer brand. Disgruntled ex-employees can destroy your reputation with an online review highlighting issues such as unrealistic workloads and poor work-life balance. This makes it harder to secure the talent you need - at exactly the time you need it.
Ultimately, overutilization negatively impacts your business prospects. Under-staffing and over-utilization might solve short-term problems - like cost efficiency or capacity issues. But they put your long-term performance at risk by undermining productivity, quality, stability, reputation, and recruitment.
On the flipside, underutilization is bad for business too.
Underutilized resources don’t deliver ROI. They cost your business money without bringing enough in to turn a profit. They also result in reduced productivity because you aren’t able to generate sufficient output from their input. This isn’t their fault - they’re not being lazy, they’re just not being given enough work.
If under-utilization is a result of a mismatch between skills available and skills needed, it can delay projects and lead to customer dissatisfaction.
Plus, under-utilization is bad for staff morale. The underused employees become bored and disengaged - while busier colleagues begrudge the unfair distribution of work. This can lead to increased turnover too.
Between wasted money, unhappy staff, and lower productivity, underutilization poses a significant risk to your business.
This is why savvy businesses monitor utilization rate as a sign of overall health in their organization - and proactively manage utilization when it starts to slide in either direction - be that at an individual or team level.
Ok, now you understand the detrimental effect of sub-par utilization, you’ll want to know how to calculate utilization rates. The first thing to do to calculate rates is to know what your business's current capacity is. This will be the standard against which you measure performance.
For example, if your production department produces 500 items per day, you can use that number as the benchmark for measuring their utilization rate. Then, if they produce only 450 items per day, they have a 10% lower utilization rate than they did before.
The same goes for your resources. The overall resource utilization rate shows you the percentage of your total resources used.
If you want to know how much of your personnel time is utilized, a utilization rate formula is simply a worker's total billable hours divided by their available hours.
So, if specialist A is available for 40 hours and works for 40 hours, you can measure how many of those hours are billable. For example, if expert A only has 30 billable hours during the 40-hour week, then specialist A's utilization rate is only 75%.
This is also referred to as the resource utilization rate.
A capacity utilization rate is the team's total utilization rate. Its formula involves adding together the utilization rates of each resource and dividing by the number of staff in the organization. This also gives you a clear picture of what your company's capacity looks like so that you can make future decisions from there.
If you want to see which resources are overused or barely touched, it is helpful to consider both capacity and resource rates.
But be careful to differentiate resource allocation from resource utilization. Resource allocation is used to select and manage the chosen resources, while resource utilization is the strategy on how to maximize the use of these resources. They are each are essential metrics to help the project attain its success.
The utilization rate for the organization's entire payroll to check if the work done for a specific payroll period is for billable time (direct labor) or non-billable time (indirect labor).
However, it is also important to look at the type of resource. For example, is the top legal practitioner in a law firm sitting idle the whole week? Highly-paid but inactive team members will significantly impact your staffing costs compared to your lower-paid staff enjoying coffee breaks and taking time off.
A business' target utilization rate is different with each company. There is no specific figure to work on because there's not a one-size-fits-all formula for an organization's needs.
A higher utilization rate may not always equate to higher profits either. A wide gap between realization rates and utilization rate may mean too much time is spent on non-billable tasks, or that too many people are working on a particular project.
According to Gartner's VP Analyst, Robert Handler, the average utilization rate should be below 80% to avoid work overload and decrease mistakes that may cause more problems for the business. This rate also accounts for the utilization ratio balance of both billable and non-billable work, avoiding employee burnout and reducing your team's idle time.
An 80% utilization rate is often recommended because it is high enough for high levels of productivity, but not so high that it actually undermines performance. Here’s why it hits that Goldilocks spot for service-based businesses.
Quality goes up
The 80% target doesn’t just give employees time to do their job - it gives them time to do it well. Running people into the ground with excessive work and tight deadlines means they’re less innovative and more likely to cut corners, which leads to sub-par outcomes and unhappy clients.
It leaves room for contingencies
If you’re constantly working staff to full capacity, it gives you no wiggle room when things go wrong or unexpected opportunities arise. The 80% rule builds a buffer into the work day - and your business as a whole - so that one unexpected issue doesn’t derail a whole project.
Not everything is billable
Aiming for 80% billable utilization leaves room for essential non-billable activities, like staff training or attending internal meetings. With skills shortages a real risk to business, it makes sense to make time for upskilling and professional development.
It prevents boredom and burnout
Employee engagement is a balancing act. You need to hit the sweet spot between keeping employees challenged and productive, without overworking them to the point where it reduces performance. The 80% rule achieves that balance. It boosts well-being and reduces the risk of involuntary turnover.
It maximizes ROI from your people
Idle hands cost money. Aiming for 80% utilization gives you a clear target for getting under-used employees back into a productive and profitable place. If you can’t make that happen, it could be under-used resources need to be re-skilled. Having a utilization goal gives you a benchmark.
Our CEO Tim Copeland agrees. He shared this story with us:
A few months back, I engaged in a conversation with the CFO of a considerably large company. During our discussion, he recounted an experience where the company had shifted its focus from staff utilization. This change came after two decades of operating as a well-established organization. For about 20 years, utilization was their North Star, getting the most out of their staff's time. It was all about making sure everyone's busy and that supposedly drove their success.
However, they’ve come to realize that the skill set possessed by their workforce wasn't necessarily the most sought-after in the market. Consequently, they chose to temporarily step back from focusing on utilization and redirect their efforts towards comprehensive staff training and development, with a particular focus on their sales team. The company even sought projects aligned with the evolving skill set they were cultivating.
This strategic shift wasn't without its challenges. It involved a six-month period of significant adjustments, entailing substantial costs for the transformative process. The result, upon reevaluation, was a scenario in which their staff's utilization was lower than before, yet the work they were undertaking held greater value for their clients.
This transition yielded an intriguing synergy: the company's profitability increased while the workforce experienced reduced stress levels.
Operating under the premise that allocating 100% of staff time solely to work tasks left little room for creativity, and even practical considerations like sick leave, they recalibrated their approach. By targeting, for instance, 80% of planned work, they allowed space for spontaneity and creativity to flourish. Instead of aiming for that elusive 100% utilization, they dialed it down to 80%.
Ultimately, this balance facilitated a more productive and innovative work environment. Entrusting employees to manage their time effectively eliminated the need for micromanagement on an hourly basis.
To calculate utilization rate targets for your company, you need to sum up your company's resource costs, overhead, and profit margin. Then divide it by the total available hours multiplied by a target billable hourly rate.
Let's say your total resource costing is $100,000, the overheads cost $10,000 per employee, and your team has 2,500 hours available. If the goal is a 25% profit margin ($110,000 x .25 = $27,500) and your target billable hourly rate is $80, then:
(100,000 + 10,000 + 27,500) / 2,500 x 80 =
137,500/200,000 = 0.6875 or 68.75%
With the given data above, your organization's ideal utilization rate should be 68.75% to meet the 25% profit margin while charging $80/hour.
A higher utilization rate shows that members of staff are spending more time working on billable projects that can generate revenue for your company. It's important to track this metric because a high utilization rate involving more billable hours will help you make better financial decisions and avoid cash-flow problems.
Monitoring when and where X amount of resources has been used is an efficient way to ensure you are not overusing or underusing resources while keeping within budget. For example, are more resources used in non-billable tasks? Is the billable hours' record updated? Track utilization rates for individuals and gauge your resources' financial spending.
If you know that what you pay your team is eating into your business's profit, then spending on your non-billable working hours needs adjustment.
Is your current billing rate by the hour commensurate to your services? If you have a high utilization rate but low profit, you may check on deliverables quantity, productivity, direct costs, and overhead costs.
Is the billable work equivalent to the number in your workforce? If your utilization rate is low, you may not have enough work to offer your team. If it's close to 100, your resources may already be overused. If your utilization rate is above 100%, it may be because of a lack of good project planning. In this case, you may want to consider hiring new people to reduce your team's workload and improve productivity.
If your team is already logging in their billable hours and you are having a hard time plotting them, you may not be able to come up with an accurate utilization rate. Instead, get user-friendly software to track time and monitor billable and non-billable hours easily.
Good software can also help you understand patterns with your team's schedule, get a real-time update of available hours, and calculate total available hours as a team. If automated, time tracking also allows you to set cut-offs, increase a worker's or team's logged hours, and save you from all the manual-time logging hassle which could be devoted to more critical working engagements.
With Runn's Timesheets, accuracy in resource utilization is a breeze. You can categorize big chunks of work, organize your team's workload into billable and non-billable hours, and know when and where your highest billable costs are.
Knowing your team's utilization rates does not help you assess the company's overall available time. Instead, use Runn's Group utilization charts to step back and look at the bigger picture. Monitor your capacity utilization rate as a team or group of teams. This software provides accurate information visually to make quick, clear-cut solutions and high-level industry decisions. Once you have sorted out the people filters: tags, group, team, and role, you won't be missing out on the details of your utilization chart.
Now that you have the means to track billable time for both team and team members, it's also important to sit down and analyze the metrics. It's not enough to be left with percentages without knowing how to scrutinize and interpret them.
Runn's People utilization reports allow you to backtrack and forecast your workers' utilization rates. These rates will allow you to compare the actual with the approximate costs, improving gaps and not judging employee performances.
It also helps you create sound predictions and implement actions based on when your team will have more free time, which roles are needed or optional, which people are overutilized, and when you will be ready to upskill or train, hire new staff, or accept new clients.
When you calculate your employees' utilization rates it's not only for your knowledge of their available and billable time. It's also a tool to assess your company's development in terms of profitability, capacity, and ability to expand to a higher level.
Ready to optimize the utilization ratio of your team? We'll help you maximize your resources and offer the latest planning, tracking, and forecasting resource management strategies. Book a demo with us today!
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