Utilization – common term, uncommon definition
When I was going through school, I remember getting critiqued on my papers by using the word ‘use’ too much. So I would work around it by substituting ‘utilize’; tricky but effective. In the consulting industry, ‘use’ should mean the same as ‘utilize’ but I find the definitions of utilize or utilization are widely varied. Answer this question: what is your target utilization for your billable consultants?
How many of you say 75%? How many of you said 95%? How many of you have a variable target depending on the user’s role in the organization? When this question is asked, I am amazed at how many people don’t respond with a counter-question – target utilization based on what? And if you did ask that question, then you are already in line with my next sentiment.
A number is just a number unless you can define how it is calculated. 75% utilization may equal 95% utilization between companies simply by how they interpret available hours and what utilization means. Working with Professional Services organizations, I’ve seen a full range of basic available hour definitions to complicated available hour definitions. Typically, though, available hours are company work hours minus public holidays. This definition tends to equal folks out when it comes to computing a value. Other common values: company work hours in total (no public holidays), or company work hours minus public holidays and minus vacation time (a more individual available hour definition). A more complicated equation usually considers more adjustments around productivity expectations and will require the capture and reflection of productivity values such as admin time, bench time, travel time, etc. I stick with the very basics here and use company work hours. This means my utilization targets are low since my denominator is a high value.
Now what does that % of hours mean on top? Billable hours are the most common. Let’s break down the billable hour definition. In theory, it is usually meant to reflect money generation per hour – thus the use of the word ‘Billable’. But what about those fixed fee projects where the more hours you work, the less profit you make. You aren’t bringing in any more money every hour you work so should that count? And what about those shadowing and mentor roles your new hires play? They may help out a bit but they are mostly learning and not billing the customer. Last, what about all that travel time your consultants are logging back and forth to the client site? They need to be there to generate the revenue but those travel hours are usually not billable to the customer (Travel Time is an interesting topic all of its own). I stick to the basics and use hours that are billable on T&M engagement and truly all hours on fixed fee bids (whether you are shadowing or not). Why so simple? My budget model, year after year, assumes an average bill rate against an average utilization or billable hour total. This gives me my revenue targets each quarter and, thus, helps me manage the organization.
I view utilization as a way to objectively define your budget model and give your consultants targets to help you achieve your company goals. Rewarding them for this activity is also part of the budget model, although you may have other targets related to compensation (another future topic). So don’t worry if your % number seems a bit too high or too low when compared to the industry standards you read about – it’s probably how you ‘use’ and ‘utilize’ your team! I’m just sayin’
