Is your utilization rate hindering profitability?
Analysts at PAC conducted a survey based on the views of 400 service-based firms in Europe and North America. They looked at expectations for revenue and profitability, future growth engines, and how things like deal size, size of client base, and utilization rates are changing.
Here, we dig deep into why effective resource utilization is probably the most important aspect of business operations for a service-based organization today. And how a higher utilization rate means more productive work and lowered costs.
What is the utilization rate?
The utilization rate in service-based firms is the percentage of time spent on billable projects vs. the total time worked, which measures how busy people are.
Utilization is a crucial metric because business leaders need to fully understand how much their people spend on billable tasks instead of non-billable tasks. Billable utilization and average hourly rate are mission-critical for the financial health of a company.
Most organizations want to be able to distinguish between billable utilization and productive utilization, which is overall utilization, including marketing, sales, general management, training, and internal projects.
Utilization is key to overall organizational profitability and productivity. It should be looked at together with overall revenue and profit per person. Usually, the biggest driver of utilization is the maturity of the business development process (marketing, sales, and recurring revenue).
How to calculate utilization
Project management is becoming increasingly strategic as firms look to improve the bottom line and maximize resources, so it is essential the utilization rate formula is properly understood.
Billable Hours
Utilization = ------------------------- x 100
Total Hours
Once you know exactly how to calculate the utilization rate and use it as a metric, it’s easy to see how it affects your organization’s profitability. If you’re not fully utilizing your resources, you’re leaving profits on the table. Dig deeper, and you’ll see that your utilization rate affects nearly every aspect of your operations.
Think about how you sell your services. Without utilization data, your sales team won’t necessarily pursue every lead, but when they have the utilization rates, they can pursue leads that result in work that is profitable, within scope, and focused on your specialization. This will help you land better clients and run a more focused sales team.
Small changes can lead to big gains
Attempting to achieve a 100% utilization rate isn’t feasible, as your staff will have other non-billable activities such as professional development, business development, possibly travel to client sites, and administrative tasks.
The survey found 42% of service-based firms did not achieve an 80% utilization rate, and 16% failed to reach 70% utilization.
A company with 200 fee earners working 220 days a year making $1000 per employee per day in billable revenue with a 70% utilization rate and a 15% margin will see $30.8m in a year in revenue and $4.62m in profit. If we increase utilization to 73.5% (just a 3.5% increase), revenue jumps to $32.34m – an increase of around 5%.
However, because the company’s costs haven’t changed, this additional $1.54m can be added directly to the margin. This means that if we boost utilization by 3.5%, we can increase the margin from 15% to 19% and total profit by 33%.
Increased utilization means more than just making more money:
- Well-utilized people are more satisfied and engaged and tend to stay with the business longer.
- Reduced headcount means salaries are more manageable.
- Individual projects are more profitable, so you can take on more billable work.
- Service delivery levels improve so your clients are more satisfied.
How to maximize utilization
Utilization challenges are having an impact on the ability of service-based organizations to deliver projects on time. From the survey nearly half (45%) failed to deliver at least a quarter of their projects on time. The IT Services sector struggled the most with 52% failing to deliver a quarter of projects on time. However, IT Services leaders will point to the challenge of emerging technology such as AI, resourcing issues, and the fluid nature of digital transformation projects as requirements often evolve during the project timeframe.
Overcoming challenges and increasing utilization rates can only be achieved by thoroughly understanding utilization, activity, and financial performance. Identifying current utilization levels is necessary, but the ability to maximize it is another.
Let’s look at the steps needed to help move your business from just tracking time to encouraging a culture that structures its processes, workflows, and attitudes in a way that treats time as your most precious commodity.
STEP 1
What exactly are we measuring?
Productive, non-billable hours can be just as important to the strategic and operational work that helps to keep the company running.
Most people in your organization are not going to be working on billable projects 100% of the time, so you need to factor in the productive non-billable time as well as holiday time and, of course, the unforeseeable that takes people away from their planned tasks when looking at ‘total utilization.’
STEP 2
What should you aim for?
Different service-based industries will have different goals, but realistic, attainable levels range from as high as 98% in law firms to around 60% in some parts of the communications industry.
You can decide on the right rate for your business by exploring industry averages and studying the habits of high-performing competitors. Set a minimum and a maximum target rather than trying to reach too high – pushing people too hard can result in poorer performance, dissatisfaction, and higher attrition rates.
STEP 3
What’s in it for me?
Maximizing your utilization levels does not mean squeezing extra work out of your people; it means redesigning the culture and developing incentives that make hitting targets worthwhile.
Transparency of real-time project data across the organization is essential. Keep your perspective strategic. Make every project’s utilization targets visible so they can achieve profitability.
STEP 4
Start small
Set goals that are achievable. Burnout and project fatigue are not going to boost profitability. Often, it’s not failing to work smart enough or hard enough that prevents improvements in utilization. It’s the hidden killers, such as lack of visibility, scope expansion, and bad allocation of resources, that are counterproductive.
However, the right mix of operational behavior and adopting the correct management and collaboration tools can solve these issues.
STEP 5
Picking the right tools for the job
Bringing in new technologies to help integrate operations can make significant improvements to utilization rates, even in organizations that are already performing well.
The right tools will be different for different organizations and will depend on size, maturity, and how far along the inevitable digital transformation journey you are.
Businesses that are still using Excel spreadsheets or Google sheets to track utilization and bill time will see immediate gains from a move to an ERP solution where information is integrated, visibility increases, and it’s possible to make more informed judgments about how to pursue opportunities.
In conclusion
Professional services firms are part of a people-driven market, and giving people the right tools to generate the right insights will lead to significant performance improvements. Time and expense capture and billing cannot be managed effectively with outdated legacy IT systems or spreadsheets.
For many firms, there is a critical gap between their IT and project management systems and their approach to resource management. There has been a significant acceleration in the number of service-based businesses investing in a more robust platform to manage resources and projects in a more integrated way in order to satisfy their clients and work more profitably.
How can Unit4 help improve your purchasing processes?
Labor-intensive legacy systems and manual processes no longer fit requirements, so why let them hold your organization back? There are many uses and advantages of specialized digital solutions for service-based firms, and all of them help business leaders improve cost efficiency throughout a project.
If your service-based organization wants to improve utilization rates and take cost planning and budgeting to the next level, Unit4 can provide ERP platforms specifically designed for your unique needs.
Our next-generation ERP, HCM, and FP&A tools help you to manage and develop your people, attract world-class talent, and ensure and proactively encourage engagement, learning, and development.
To discover more, click here to talk to our sales team and see what our ERP solution can do for your organization, and click here to download the full survey report.
