In our e-book, Compass, we cover the various utilization metrics that most professional services firms track and manage. Utilization is an important metric when analyzing the productivity of your organization. But, how do you determine the utilization targets that are healthy for your business?
Historically, businesses have worked towards a preconceived notion of billability that is often dictated by an industry “standard”. As a solutions consultancy, 80% may be a familiar number; for staffing firms, 92% may be the norm. The question to ask is: Have you considered breaking from industry norms to think about what utilization is best for your business?
When firms put together their business plans – either as an emerging business, or on a periodic (often yearly) basis – utilization is used as a key input. “I know that my annual billable utilization target is X% and, using that, can determine that my billable hours each year will be X2, which multiplied by my average bill rate (ABR) should give me $Y revenue and that will drive Z% services gross margin”. Provided Z is your desired target, everything seems great -- right?
But how is the overall “health” of your business aside from whether you are hitting your services gross margin number? Are your consultants burning out? Are efforts to work on the business falling by the wayside? Are you failing to scale at an acceptable rate according to your business plan? Are you always struggling to hire “just in time” to start new projects? Do you have a problem with subject matter expertise being available during the sales cycle? Are you constantly shifting resources in the middle of projects to fill gaps?
If the answers to any of these questions are “yes”, then you may need to “break free” from industry norms and evaluate whether your target utilization is realistic and/or appropriate for your business. While utilization as an input is important, evaluating your culture, your need for working on the business, and resource availability are important factors for determining what “productive” means within your firm. And, once you have come to an honest assessment of what billability means in your organization, you have other levers to work with – ABR, margin-by-role, costs, etc. – to influence your ability to drive margin for your business.
