How to Measure and Improve Billable Utilization with Professional Services Automation
PUBLISHED: APRIL 2019
Many of the world’s most dynamic services organizations now utilize Professional Services Automation (PSA) to drive improvements in their business. One of the most effective ways that PSA helps a services organization to increase revenue is by realizing more of the value of the available resource time, otherwise known as billable utilization. In this article, we explore the meaning of billable utilization as well as methods to improve it.
What is billable utilization?
Services organizations employ expert resources, which constitute the major cost in this sector. The major challenge these businesses face is proper resource management and allocation—matching up the time of the resources with appropriate work for customers. This is time-sensitive and complex. If our employed resources don’t have work to do next week for paying customers, that is going to cost the business money. The time that is available to customers is the billable utilization.
What is the realization rate?
If people are putting in all the hours they are paid for, perhaps 40 hours a week, their time is fully utilized. But some of that utilization may not be customer-facing work for customers. They could be working on internal projects, administration or pre-sales effort. Other kinds of utilization may be customer-facing but not billable. For instance, the work was done but not to an acceptable standard so resources have to go in and do it again. The hours that the customer is actually billed for is the realization rate. It is expressed as a percentage of the billable utilization.
What is over-utilization?
Sometimes in services businesses, resources end up working more than their allotted 40 hours or whatever it may be. They may find themselves putting in long hours to deliver what someone else said they would do in a working day. Some PS organizations don’t collect the total time that staff really work on their timesheets, they only register that the person worked a full week. However, it is critical to take into account resources that are being over-utilized. We argue that it is important to know about the extra effort people are putting in. Over-utilization comes with potential risks for the organization – burn-out, people leaving and so on. If we don’t collect this information, we can’t use it to make the time estimates better next time. If you keep over-utilizing your employees, consider checking out these nine tips to improve resource utilization in the next 30, 60, and 90 days.
What is average rate?
Average rate is what you charge on average per day for a consultant on a given project or period of time. For example, in a fixed price contract, where the amount of work required was initially underestimated, you end up still billing for it, just at a reduced rate. You charge the same amount – the fixed price – but because you have to stretch it further, the average rate you earned per hour on this project will be lower than forecast.
Utilization is an important metric – but average rate is also key to working out how the business is doing. So you can have 100 percent billable utilization at an average rate of 600 dollars a day or 100 per cent at an average rate of 300 per day. So in fixed price where a lot of extra work was required, you still get same per cent amount of billable utilization you just make a far lower average rate. The latter is a good indicator of the success of a project, ie you won it at 700 dollars per day average rate but delivered at 400 dollars.
What is the right target utilization for your business?
In fact, people cannot be 100% utilized. But everyone in the business needs to agree what billable utilization actually is? Do you include vacation and public holidays for example? One firm’s 80% utilization is not the same as another’s. It is also important to understand what a good utilization rate is for your business. That depends on calculating the percentage thresholds are for a specific business to make money and stay in business. For example, it might be for a given business that 60% billable utilization is profit-making and below is loss making, 60-65% is okay, 65-70% is excellent and 70% is frankly too high and you need to investigate why (there could be valid reason like end of a project). If all your teams know these thresholds for their firm it’s easier at a glance to see where to focus attention – ie have actions based on thresholds that everyone understands, don’t try and make it an exact science. Some people will need to understand the minutiae, but it is better that all people know the simple stuff, that will help to drive balanced and consistent performance
Is billable utilization going up or down?
It is very important to be aware of trends in billable utilization. In order to measure it accurately, the first step is to capture all of the hours resources put in. It is vital to have visibility of the hours people are actually putting in on all kinds of projects. Once you have the timesheets, essentially, you take the amount of hours the person was deemed to be available in a week and then divide that by the number of hours that the customer is getting billed for. By doing this over time, you in theory come up with a way of monitoring for trends within the business.
Looking for trends is much more valuable than trying to compare individual performance. That could throw up anomalies – someone who did a lot of work that was substandard could end up with a higher billable utilization rate than the person who was sent in to redo it. But, if billable utilization is going down across the company over time, that would be a reason for concern. Alternatively, if you manage to raise it by a percentage point or two, should have a direct effect on revenue.
Three Ways to Improve Billable Utilization
Implementing a powerful PSA throughout the organization, brings everyone together on a single source of the truth. You may be asking, what is a PSA? PSA is a collaborative workplace tool which increases operational effectiveness. In turn this means that more resources spend more time on appropriate, billable projects. These are some of the ways in which PSA supports this improvement.
Enabling resource managers to allocate resources more proactively
Proactively allocating resources to that they spend as much of their time as possible working for customers requires a great deal of planning. In a business which is resourcing reactively, time is often wasted moving resources from one engagement to another at short notice. Or people may end up between projects with days or even weeks when there is no billable work for them.
A PSA grants visibility of the resource pool across the whole company, unlocking windows of billable time that may have been siloed within a department or a single team. You get a more granular view of time and can allocate it in smaller amounts – hours instead of days. These functions make it easier for resource managers to get the right resources in front of the right customers more of the time.
Looking ahead and soft-booking projects as soon as they reach a high degree of probability, enables resource managers to be able to plan ahead better, maximising the use of employees instead of expensive contractors, and building effective teams.
More effective delivery
Using a PSA to manage projects as they are delivered gives greater visibility of how they are progressing. When the milestones and effort completion metrics are up to date, benefits of a PSA include getting an early alert if the project is starting to veer off track. That means there are fewer nasty surprises at the end of projects, where expensive resources have to be pulled in, perhaps from other projects, to put in hours to get the project back on track. That situation will reduce the average rate of everyone on the project.
Because PSA makes it easier to collect data about the hours people are actually putting in, instead of just registering a weekly total, over time it can also help to ensure that proposals are more in line with how the work will be delivered. Making this more predictable helps to ensure the forecast billable utilization and the realization rates don’t vary. Sometimes, for commercial reasons – to attract a different kind of customer perhaps – the business may take a decision to offer a reduced price for a fixed price project. But it is important to flag this up – where the project manager knows that this project was sold at a low average rate they will be in a better position to manage it effectively. It is also better to reduce the average rate that to underestimate the amount of work required – the total amount may end up the same but underestimating time builds inaccurate information into the system.
Tuning to the market
Getting billable utilization rates up and keeping them high depend on the business having resources with the right skill-sets to meet demand. Over time skills that were once in demand are likely to become less useful. Resources have to update their skills and organizations have to look for opportunities to recruit and train for new skills.
Having a PSA enables the organization to build an accurate forecast. They can aggregate demand and use that for the basis for hiring, and constantly tune the offers and propositions in line with the demand they see in the pipeline
In conclusion, adopting a powerful PSA like Kimble helps businesses to track their billable utilization, the realization rate and the profitability of each project. Monitoring this accurately over time allows the business to be alert to trends – is the billable utilization rate going up or down? This is the kind of information that is vital for driving business efficiency. For more information on this topic, check out our 2018 PS Pricing Compensation and Utilization Benchmark and How to Make a Professional Services Firm More Profitable.