Why are employee utilization rates the key to profitability? No matter the focus of an organization – from a software development firm to a marketing agency or a management consultancy firm – they are primarily selling time and their team’s expertise. As such, they need a targeted model for billable resources that applies to each employee across the organization. This requires a utilization rate.
What is a utilization rate and billable resource?
Utilization rates are a way to measure the efficiency and productivity of an individual (or even an entire organization) in generating revenue against available bandwidth, divided over a set period of time. In simpler terms, a utilization rate reflects the percentage of an employee’s work hours that can be billed to a client versus their overall availability. In other words, it measures how busy employees are.
If you have ever worked on a deliverable for a client, for which you or your company is paid – then you have been a billable resource.
How do you calculate employee utilization rates?
To calculate employee utilization rates correctly, understand that different roles have different rates. As an example, someone with managerial responsibilities wouldn’t have as high a rate as someone working directly on a project. Why? You’d expect them to spend a good amount of their time managing personnel and performing other duties that are not directly billable to a client.
A staffer responsible for overseeing a financial area like account payables or someone heading up human resources is probably not generating a lot of billable hours, either. Are they still instrumental to your success? Absolutely. But they shouldn’t have the same utilization rate as a graphic designer or an accountant who spends the most of their time on billable client projects
Which brings up a good rule to keep in mind when assessing utilization rates: employees involved in billable client work need to not only cover their own salaries, but also need to allocate a portion to functions that don’t generate revenue. So, a percentage of overhead costs needs to be divided amongst billable employees to ensure profitability for your overall organization.
Determining billable versus non-billable time is also important. Consider time employees spend on personal professional development, in internal company meetings, and on paid time off. These are all important; you certainly want to grow employee skills and don’t want them to be overworked. But if you fail to incorporate non-billable hours from the outset, any calculations will be way off.
Basic formula to calculate employee utilization rates looks like this:
- Begin with 260 working days per year (52 weeks x 5 days).
- Then deduct the following internal or paid time off activities (you’ll need to adjust to fit your business):
- Vacation days (say 25 days)
- Sick days (5 days)
- Internal activities such as training, off-sites and meetings (15 days)
- Professional development or conference attendance (10 days)
- That leaves you with 205 days of billable client work. Divide that by the total 260 working days, and you’re left with a 78 percent target utilization rate.
- Beyond this, you may deduct other non-billable work activities, such as client target rates will differ from each other.
Billability vs. utilization: How can employee billability drive profitability?
All of these factors detailed above need to be used to develop target margins. Those targets should then be reflected in utilization rates at every level of your business. It’s vital to set and be able to analyze these rates in order to establish and grow profit margins.
With this in mind, you should then use these utilization rates to establish billability targets, or the number of billable hours each employee should hit. These should be shared with individual employees, as well as teams, giving everyone realistic goals all can work towards.
It’s important that you have visibility into the status of utilization at all times. You need to be able to plan ahead in order to fulfill client work, improve employee bandwidth and make sure the right resources are in place. You don’t want employees to be idle and worried about insufficient work in the pipeline. Nor do you want them overwhelmed and be forced to hire in a way that’s not cost-effective.
You always need to know that enough revenue is being generated and that projects are completed profitably. For that, you need real-time visibility across your organization.
Can tools help companies raise utilization rates and billability?
Definitely yes. RMT helps you stay on tops of utilization and delivery. It’s a software that can make utilization and billability calculations a snap. It helps you effectively track these two parameters, and accordingly to predict resource availability, capacity as well as ease your planning and future workload. On desktop and mobile devices!
A RMT (Resource Management Tool) software, developed by RCMT IT Europe can help leaders to monitor their employees utilization and billability, offering constant visibility along with the possibility to analyze the past and anticipate the future.
As a result, scopes of work are on-target, margins are effectively managed and grown, and the pipeline is accurately forecasted.
Equally important, it gives you a realistic view of employees. You can make sure they’re not getting burnt out and that they have the right resources and skills in place to meet demands. You can empower staff to take ownership of work, ensure that they’ve got projects to tackle and are able to achieve their deliverable targets.
RMT provides the best view on utilization and billability through all possible angles: overall company utilization, employees, departments, companies.
It also provides you with the possibility to export these reports in xls format in order to use them outside of the application for various different purposes.
RMT is all you need to get complete visibility, maximal utilization and adequate workload balance of your resources. RMT allows you to:
- Manage projects, resources, branches – Add, Edit, Delete
- Manage the work schedule – assign bookings for team members based on their expertise and availability
- Control the workload – see resource’s availability and who is busy. Monitor team’s utilization and billability across different projects, departments, companies.
- Plan future projects – visibility in production pipeline allows to forecast the available employees and plan accordingly
- Find the right people fast – filtering based on skills and seniority
- Add & Edit assignments – daily or for specific period of time
- Billable time – tracking billable hours across different projects, branches
- Analyze resources performance – generated reports for utilization and billability
- Share your insights – Export .xls reports to share them with the clients or stakeholders
If you feel that a tool of this kind is the right match for your company’s resources and the projects you manage, feel free to contact us for a demo. We’ll be happy to show you how RMT (also known as ReMoTe) can improve the way you track utilization and billability to harvest the most out of your team’s abilities.
This article was written by Jelena Todorov Kalezić, Head of PMO @RCMT IT Europe