Labor Utilization is a critical metric to assess just how you’re doing as an organization – and a great way to benchmark yourself against your corporate objectives and your peers.
If you’re a Services organization, you definitely want to know what’s “up” with utilization. To be more specific – how is your staff being utilized? How “billable” are your personnel? And of the billable hours that your people are putting in – are you managing to capture enough of those hours in billing, without excessive discounting or “removal” of hours? Let’s take a look at some of the metrics Services organizations need to be aware of.
Pretty much all Services organizations are aware of this key metric. Of the total hours worked by your staff, how many of those hours are being used to generate revenue, or on tasks that are considered to be critical to generating revenue? Say Anne is working a 50 hour work week, had an 8 hour sick day and 7 hours in non-billable, or idle, time. Anne’s total time spent on “revenue-generating” tasks was 35 hours – her resource utilization is 70%. If your corporate objective is to keep billable staff at 75% utilized on activities contributing to revenue – Anne is below the threshold. Perhaps time to take a closer look at the 7 hours of idle time and find opportunities to turn those hours into revenue, or at the least, into hours that contribute to generating revenue. Next, let’s look at Billable Utilization as an additional way to view billable time.
A close relation to Resource Utilization, Billable Utilization looks at how “billable” staff is, based on either the target hours that are considered to be available for billable work, or on the total hours worked. For purposes of our example, Anne’s company bases their Billable Utilization on an expected 40 hour work week. Their target Billable Utilization is 85%, or a total of 34 billable hours. Now, looking at Anne’s hours, she worked 35 hours on billable work of an expected 40 hour work week. Anne’s billable utilization is 87.5%, which puts her week ahead of the corporate objective of 85% billable utilization. Although Anne’s resource utilization was lower than target, her billable utilization was higher than target. Anne made up for her 7 idle hours and kept her Billable Utilization on target.
The last metric we want to take a look at is Realized Billable – how much revenue you are actually making from those billable hours. Now, everyone in a Services organization knows that not all “billable” hours will end up on an invoice. Customers may have complaints, concessions may need to be made – and a discount ends up being applied to an invoice. A key metric in determining what level of revenue reduction you are willing to live with, Realized Billable also provides insight into potential quality issues, or project management issues. Let’s go back to the example of Anne. Anne’s employer has set a key performance metric of 97.5% realized billable, meaning that a 2.5% discount off of billable work is an acceptable threshold. When the invoicing is prepared for Anne’s week, only 30 hours of the 35 billable hours could be billed, due to a concern from the customer. The realized billable for the project, this week, was 86% - below the company objective of 97.5%. Although Anne’s Billable Utilization exceeded the company target, the Realized Billable from her work was well below.
As you can see, setting your target labor performance metrics and evaluating actual labor performance metrics is critical to managing revenue in a Services organization.
We'd love to know what are the key labor performance metrics your organization uses?