Measuring Utilization in a Consulting Firm
One of the most important KPIs you can focus on in a consulting firm is staff utilization. I’m often surprised by the number of technical consulting firms I speak with that aren’t measuring their team’s utilization rate. And then, unsurprisingly, they tend to not be in the group of the most profitable ones. Those firms that do measure utilization tend to be the most profitable. In their case what I see more often is some level of uncertainty on whether they are measuring utilization in the right way for the context of their firm.
So what is utilization?
At its most basic, utilization is:
number of hours doing work/total number of hours available = UTILIZATION
Simple right? Well, as many of you have probably found on your experience – it isn’t that simple.
How much of the work done was actually billed? And how much should have been billed (Not the same thing!). Should you take paid time off (PTO) or other missed time into the equation? Is all that time accurately logged by everyone on the team anyway?
While challenging, I highly encourage all our clients to find a way to measure utilization in their firm.
The starting point is to answer three key questions:
- What constitutes “hours doing work”? Some work obviously belongs – billed hours on a time and materials project should definitely go in there and is relatively easy to pull together. But what about the work on that fixed-fee project that is over-budget? What about useful but non-billable work? Quoting and proposal-preparation work on won projects? There is a lot to consider regarding the activities that your employees undertake in your firm.
- The other major thing to decide is what to use as the denominator (hours available). Do I use the standard 2080 hours in a year? Less allocated vacation? Do I exclude company holidays? Is it different for employees that are allocated more vacation? What about contractors (aka: 1099’s)?
- Once I’ve figured out how I want to measure utilization, can I even track it without spending hours and hours doing it? Do the tools I have support my ability to measure this now and a year from now?
As you approach these questions, understand that what is more important is not how you answer them, but that you actually do answer them and set a consistent framework. You may want to consider how other consulting firms in the industry measure their utilization in case you want to benchmark – or you may not. In any case, once our clients have worked through these questions they quickly start to move forward measuring utilization.
How To Measure
If you’re wondering where to start, here’s my advice on moving forward:
Take small steps
An overly simplistic view isn’t a bad place to start – include all the work that is easy to get and you’re confident belongs in the numerator. This can serve as a meaningful benchmark as you get more sophisticated in how you measure. As for the denominator, pick a starting point that you think is consistent with how other firms may measure and is simple – like 2080 hours.
Or, as I often do with our clients, start off with measuring billable utilization simply with the data that is entered into the system:
number of billable hours performed/total number of hours available = billable utilization
This accomplishes two things. First and foremost, it emphasizes using only the information that is in your time tracking system and therefore is easy to get to. Second, the measurement is easily understood by those entering time, making it easier for you to manage.
Measure it in different ways
As you begin to refine your utilization measurement, don’t throw out tracking your previous measurements. More often than not, placing different lenses on the team’s performance will get you deeper insight into your actual productivity and the activities that are truly contributing to the success of the firm – and likely uncover some major inefficiencies.
It’s a marathon, not a sprint – so sticking with a measurement over time will get you better insights that can lead to meaningful change. Flip-flopping between different measurements can leave you frustrated and undermine what you’re trying to achieve in measuring utilization.
Find tools that make this process easy.
I love spreadsheets and highly encourage their use. They are a great starting point when you are beginning to plan, track, and manage new KPIs. There is also that sense of pride and ownership that comes with my highly customized spreadsheets but – over time – exporting, cleaning up, cutting and pasting and tweaking will take up a lot of your (and your team’s) time. Often I can’t even get to the data I need to make my calculation meaningful. And the reality is that I can get precious hours back by using flexible tools with direct access to the data I’m trying to analyze. That is why one of our primary goals at EVX is to make measuring utilization (and other consulting KPIs) simple and easy.
What obstacles have you come across in your journey to measure utilization? We’d love to hear in our quest to make it easier to manage your technical consulting business!