For any organization looking to improve its profitability, utilization rate is a vital metric to track to ensure success, particularly in businesses that bill by the hour. If you don’t have a clear picture of how well utilized your teams are, there’s no way you can fully understand your productivity and efficiency.
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What is Utilization Rate?
Utilization rate is the percentage of an employee’s total amount of working hours that actually contribute to the work that is eventually billed to a customer. The utilization rate is most commonly used in professional services, but can be used by other organizations to assess their team’s current productivity.
Time will always be a limitation, no matter how productive or determined an employee is to achieve their maximum output. No human will do well when aiming for being ‘on’ 100% of the time.
If a typical employee works 40 hours a week, there’s no chance they will be doing 40 hours of billable work. Meetings, phone calls and training all play a part in this. When looking at the utilization rate, it helps to strike the right balance. Too high a rate could mean your organization is cutting corners with important internal work and you may require additional resources. If this figure is deemed too low, this often means you’re not getting enough work for your whole team.
So what is a good utilization rate?
This will always be shaped by the individual company. There is no ‘sweet spot’ number that works for every organization, and it is by no means the case of the higher the utilization rate, the better it will be for you. If a utilization rate is consistently around the 100% mark, this is a pretty big hint that your employees are being overworked and could be nearing burnout. If this applies to you, this is your sign to make you think that it may be time to bring in more staff. If your utilization rate is above 100%, this is a strong indicator that you have too much out-of-scope work or have poor planning.
Why Are We Interested in Resource Utilization?
The utilization rate may appear a fairly simple measurement, but tracking this can have a great impact on employee engagement and productivity at work.
There’s a wide range of valuable insights you can acquire if you track utilization rates.
By drilling down into employee utilization rates either by job role or department, you can identify areas with the highest demand and also where they have the highest utilization rates. This allows you to make better-informed decisions and identify promising opportunities to grow the organization, and the areas where you could bring in more staff.
If you align utilization rates to profit, you can gain insight into which services generate the most profit.
Both of these insights help salespeople. If you know which project types are the most profitable, and which play to the business's strengths, no time needs to be wasted on leads that don’t tie in with the business strategy.
A utilization rate which frequently approaches 100% signifies that your staff are being overworked, and now may be the best time to expand.
Utilization Formula: How to Calculate Utilization Rate
So what’s the most effective way to calculate utilization rate? The standard formula is fairly simple. Take a look below:
Total Billable Hours / Total Hours Available
If an employee billed for 32 hours from a 40-hour week, their utilization rate would be 80%.
There are several different methods of calculating utilization rates depending on what you’re trying to understand, whether it’s pricing, hiring, etc. To calculate your utilization rate of the wider firm, all you need to do is divide the total of all employee utilization rates by the total number of employees. The utilization rate can also be calculated for each resource you own on a weekly, monthly, and yearly basis.
Using Resource Utilization Metrics to Inform Strategy
The more you read on utilization rates, the easier it is to see how they affect an organization’s profitability. If you’re not utilizing your resources to the max, you’re leaving profits at the front door.
Take a closer look and you’ll see that utilization rate impacts almost every aspect of your business operations.
Let’s look at one of these aspects - sales. Without utilization data, your salespeople won’t be able to chase all of their leads, irrespective of what work it creates.
When you load them with utilization rates however, your salespeople can effectively pursue leads that end up in work which is profitable, within scope, and focused on your firm’s specialization.
Take a look below at some of the ways utilization affects how your organization operates:
Map Skill Demand:
How do you make the decision on the skills and services your organization should prioritize and specialize in?
One source for this answer could be to assess utilization rates for various skills in previous years. This can help you find out:
Which skills hiring should be focused on
Which skills to prioritize, and which to ignore
Seasonal demand for skills
For example, you may observe that your content writers have a 50% higher utilization rate than your social media marketers. You can then shift efforts towards developing your content writing expertise since that has higher demand.
On the other hand, you may see that social media utilization peaks during the Holiday season. Tracking these utilization rates allows you to see these trends and hire external social media marketers in advance to meet the upcoming high demand.
You can take this one step further by tracking the billable vs non-billable time spent on each skill. If too much time is being taken up on non-billable work for a particular skill, this could mean that customers return with unpaid rework requests. This is a sure sign of low proficiency in this skill and more time may need to be spent on retraining.
Develop Talent
Utilization rates can also aid in spotting issues with talent development.
You ideally want your senior resources to work on the projects with the highest value. You also want them to dedicate time to spend on internal business development and mentoring more junior colleagues.
If it’s clear by your utilization rate that junior resources are underutilized while senior resources are spending significant time on low-value customers, this could be a sign you have an issue with talent development. Junior employees don’t know enough and seniors don’t have enough time for high-value mentoring work.
With this, it is clear to see the importance of tracking utilization rates by resource seniority as well as skill. This can help you identify junior talent which needs additional training, for instance if they spend too much time on non-billable work due to excessive rework requests.
Calculating your Ideal Utilization Rate
The ideal utilization rate for your business balances the targeted billable rate with all of the company’s staffing expenses, as well as overhead and profit margin.
In order to calculate the ideal utilization rate, a good place to start is with a target hourly billing rate and then work backwards to determine the necessary billable utilization using the ideal utilization rate formula. We must also have an understanding of the capacity utilization rate, as this is used to work out the optimal billing rate.
Capacity utilization rate:
The capacity utilization rate is the average rate of utilization for all of a company’s employees. It can be calculated using the formula below:
Total of all employee utilization rates / Total number of employees
The capacity utilization rate is a useful number as it can highlight the efficiency of the entire business when it comes to how they utilize their available hours. The higher the better!
If your company has a low capacity utilization rate, you risk losing the billable value of these hours, sacrificing a significant portion of profits.
Optimal billing rate:
If a company is looking to find out what it should charge per hour for its resources and labor, it would use the following formula:
(Resource costs + overhead + profit margin) / Total average labor hours
This figure gives them the optimal hourly billing rate. While it’s standard practice to use a firm’s capacity utilization rate to calculate an optimal hourly rate, this makes a big assumption that the capacity utilization rate is a healthy one.
Ideal utilization rate:
If a company’s capacity utilization rate was lower than expected, the optimal hourly billing rate would be higher, and you risk charging your customers more than they are willing to pay. You would effectively be punishing your clients due to your reduced billable hours.
It’s crucial to begin with a target hourly billable rate, then work backwards to come up with an ideal utilization rate which enables the target billable rate to deliver the ideal profit margin.
The formula for the ideal utilization rate is below:
(Resource costs + overhead + profit margin) / Total available hours x Target billable rate
How to Increase Utilization Rates
With the information in this blog alone, it’s clear to see that utilization rate has a significant impact on every part of your organization’s operations. Tracking it could also give you further insight into what makes your business tick and how it can be improved.
It’s important to bear in mind that there’s only so much billable work you can extract from your staff - 100% is a pipe dream.
Nevertheless, increasing your utilization rate up to a higher but still manageable level can reap significant benefits, most notably in profitability. So here are some ways you can increase your utilization rate.
1. Use better time-tracking software
Mapping your utilization rate won’t really work if you don’t track how resources are using their time. It is a tedious process, but it is the cost of greater visibility.
Incorporating time-tracking into your workflow can help to ease the process. Tracking time can often be done through gritted teeth if another system has to be launched to do so, so if it can be made into a part of an existing platform, you’ll see greater compliance and more accurate data.
2. Develop better reporting
Isolated utilization rate tracking won’t be much help. In order to make it work with your measures, it’s important to connect it to your other key metrics such as profitability. This gives you a better basis by which to place utilization rate in the context of your strategy.
3. Establish utilization rate benchmarks
According to a report from SoDa, utilization rate remains one of the top five metrics tracked by businesses.
Despite its clear importance and widespread adoption, businesses rarely agree on a standard utilization rate. They commonly look to industry benchmarks which will be too vague and inaccurate as they will ignore the context of their business.
This harbors an environment where no one in the organization knows if their utilization is good enough.
The best way to come up with a baseline is identify your target billing rate and work backwards from that. Once this is shared with your teams, they will have a better understanding of where they stand and how they will reach that benchmark number.
4. Track utilization rates across the whole organization
Utilization rate is most effective when it’s being tracked across the entire business and not just a particular department.
This is the case for two reasons:
It can give you insight into preferences and managerial practices for different offices or departments.
It can help you share expertise between different departments in the event of over-utilization.
It enables you to share utilization across the whole firm. If a junior salesperson is facing temporary over-utilization, you can borrow expertise from an under-utilized designer from another office.
This is much more preferable to hiring contractors or freelancers as it will not add to your costs, and an internal resource would already know the work practices inside out.
5. Minimize non-billable time
Any time you can’t bill customers for can usually be attributed to one of three problem areas:
Sales - There is not enough work for all members of the team
Skills - The existing skills you have to hand are not enough to meet demand
Management - Your project managers have not been delegating work effectively
Non-billable time cannot be avoided in any organization, but its impact can be reduced. For example, a better project management strategy can help to ensure that your current resources are distributed optimally.
What Next?
This Precursive guide to utilization rates has introduced you to what it is, how to calculate it, the process of working out your ideal utilization rate and why all of this is important.
If you’ve found this post useful, you may also want to read:
Keen to learn how Precursive’s software can help? Visit the Precursive Resource Management page or book a demo today - or, if it's Professional Services Automation you're after, discover our cutting-edge PSA software.
