Utilization is one of the most important metrics in professional services, but it’s also one of the most poorly understood. When utilization metrics are calculated and leveraged appropriately, they are incredibly helpful in evaluating the productivity of individual employees and of the team as a whole. But when utilization data is captured and interpreted poorly, it can create angst amongst the team, lead to poor operational decisions, and hurt future performance.

So, what is the general concept of utilization and how is it calculated? Utilization is simply the number of hours worked in a time period divided by the available number of hours. If a machine in a factory is available 24 hours per day, but was only used for 20 hours yesterday, its utilization for yesterday would be 83.33% (20 / 24 = 83.33%). In professional services, we are evaluating humans instead of machines, but the general concept is the same.

To properly evaluate firm productivity, it’s important to view utilization through multiple lenses.

Billable Utilization

When people talk about “utilization” in a professional services context, they are almost always referring to “billable utilization”. This is because billable utilization has a direct correlation to revenue. But, as discussed below, it’s a mistake for firm management to only evaluate and publicize billable utilization. Unfortunately, this mistake is made more often than not, by both small and large firms.

Billable utilization is the total number of billable hours worked for clients in a period of time divided by the available hours. If a full-time employee bills 32 hours out of a 40-hour workweek, that employee has a billable utilization of 80% for the week. The math and concept are simple. You can also evaluate the utilization across the company as a whole over any period of time. For example, a services firm with 20 employees delivers 34,000 billable hours over the course of a year out of 41,600 available hours, for a firm-wide billable utilization rate of 81.7%.

But what happens when some of the hours worked for clients aren’t billable? Ideally, this won’t happen, but it does from time to time. A project may go over its hours budget or some free re-work may be needed. In either case, it is likely that some “free” non-billable hours will be worked on the project. If Susan works 40 hours, but only 20 of those were billable because the project was over budget, she would only have a 50% billable utilization figure even though she worked 40 hours. This is why it is important to look at other utilization metrics beyond billable utilization.

Client Utilization

“Client Utilization” is similar to billable utilization except that it considers both billable and non-billable client hours. If Susan delivers 32 billable hours and 8 non-billable hours on client work in a given week, she would have billable utilization of 80% and client utilization of 100%.

With client utilization, our denominator remains the same (it is the total available hours in the timeframe). But our numerator is the sum of both the billable and non-billable hours worked for clients.

The reason it is important to evaluate client utilization is because the person whose billable utilization is hurt by the non-billable hours may have had nothing to do with the original cause. An employee may have had no role in the estimation of the project and thus shouldn’t be penalized if the project takes longer than planned to complete. Or, a senior employee may be asked to pitch in and “save a project” even though there are no billable hours left. The non-billable hours related to that remediation work would not be the fault of the senior employee.

Total Utilization

Most employees of consulting firms engage in internal activities from time to time. An employee might be asked to redesign the company’s website or build out some training materials. Internal projects are important to the ongoing prosperity of the firm. But what happens to billable utilization and client utilization metrics when employees work on internal efforts? They tank.

When companies only evaluate employee productivity through billable or client utilization, it creates an environment where employees don’t want to work on internal projects. Over time, this has a negative impact on the growth and maturity of the company. Strategic internal projects (such as marketing programs) get pushed off because employees want to stay billable. This is why firm leaders must periodically adjust billable utilization goals and must also monitor “Total Utilization”.

Total utilization includes all hours worked in the numerator (internal plus client hours) with the same denominator of available hours. It indicates the relative volume of hours an employee delivers, regardless of the type of work being done. Let’s look at a simple example to illustrate why evaluating all three utilization metrics is important.

There are 21 business days in March of a given year. Susan is a full-time employee and has 168 available hours in the month. Susan billed 80 hours to clients during the month and had a billable utilization rate of 47.6%. If her company leaders only look at billable utilization, Susan would look like a severe underperformer. But Susan also worked 40 non-billable hours on client projects during the month, helping fix some mistakes made by others. This resulted in client utilization of 71.4%, which is better, but still not highly productive. Evaluating her time entries further, Susan worked 80 hours on a mission-critical marketing project and thus had 200 total hours worked in March for a total utilization figure of 119%. Without evaluating all three utilization metrics, it is impossible to understand how hard Susan was working over the month.

Adjusting for Time Off

It is important to also evaluate the three main utilization metrics with respect to the time off that the person took during the month. If a person took 40 hours of vacation in a 160-hour month, the “time-off adjusted” version of the utilization figures would use 120 hours in the denominator instead of 160 hours. Without the ability to evaluate the time-off adjusted versions of the utilization figures, it is impossible to gauge relative productivity from month-to-month.

Here is an example to illustrate the importance. If a firm has 20 full-time services personnel and there are 21 business days in December, there are 168 total available hours per person which yields a total of 3,360 hours for the firm. If the team billed 2,200 hours in December, that would result in a billable utilization of 65.5% (2,200/3,360 = 65.5%), which is not good. But each of the 20 delivery personnel took 40 hours off for the holidays and thus the team’s time-off adjusted billable utilization was 85.9% (2200/2560 [3360-800] = 85.9%), which is much better! By looking at both numbers, we can understand that while December wasn’t good in terms of revenue generation, the team actually was highly-productive when not out on vacation.

The time-off adjusted versions of the utilization metrics are the only way to compare the workforce productivity of a month like December (with a lot of vacation) to a month like October (often with very little vacation). It is quite possible that the team worked harder within its available time in December, even though revenue generation was far below October. Without evaluating time-off adjusted utilization metrics, there is no way to compare relative workforce productivity from month-to-month.