Outside the services and solutions world utilization and chargeability have little meaning. Inside a consulting company, however, these two numbers drive your business.
Let’s take a closer look at each.
What Is Utilization?
In short, utilization measures whether your consultants are doing anything. More specifically, is the work they’re doing right now tied back to a particular project of some sort?
This of course could be a traditional billed project, but there are many other types of utilization too:
- Proposal work
- Internal projects (e.g. R&D, product development)
You might think that covers just about everything, so what’s excluded? Fancy you ask…
What Is Not Utilization?
Bench time, or “the Beach” as some firms like to glamorize, is a common culprit. When a consultant is in between projects they’ll often spend a week or two on the bench. This is an easy one to exclude from utilization.
However, people often overlook grey areas. By grey areas I mean times when you might generalize an employee into a category without a specific project. Training is a great example. If Mark is unstaffed you might tell him to go do some training. In this case, does this count as utilization? Well, personally I’ve found that this depends. If Mark is going off to a Big Nerd Ranch class for a week then yes, I’ll count this as utilization. If he’s spending a half day building reputation points on StackExchange then no, this isn’t utilization. The litmus test is this – if a client walked in today with a new project, would you pull Mark from the training he’s on to start on that project? If you would pull him off, he’s not being utilized.
Once you’ve classified the work the calculation is incredibly simple. If Mark spent 2 days on a client project, 2 days on an internal project, Friday morning “training” (aka catching up on HackerNews) and Friday afternoon on scheduled vacation, then he’s 90% utilized (36 hours out of 40 total – the 4 hours on HN don’t count).
And Why Do We Care?
In an ideal world your utilization is near 100%. As you near 100% utilization your employees are working on billable work, there’s a steady pipeline of work planned and time off like vacation and training is properly scheduled.
This means your labor productivity is high, meaning you’re getting the most value out of each employee possible. Maximizing value from each employee allows for higher salaries and thus a big edge in the competitive recruiting pool. High labor productivity also leads to higher profit margins, which is good for business. And subjectively, I’ve also found that highly utilized employees are much happier as well.
What Is Chargeability?
Chargeability is simple. Is someone getting a bill for the work that the employee is currently doing? If so, then the work is chargeable.
What Is Not Chargeability?
Obvious time to insert a venn diagram.
Revisiting the previous example with Mark, he spent 2 days on a client project, 2 days on an internal project, Friday morning on HackerNews and Friday afternoon on scheduled vacation. This makes Mark only 40% chargeable (16 hours – 2 days – out of 40 hours total) despite being 90% utilized. Annnd that’s ok! Why you ask…?
And Why Do We Care?
With utilization you’re generally striving to make it as high as possible. With chargeability that’s not always the case. On the low end you need to know your breakeven chargeability, or the minimum number of hours your company needs to bill in a period to remain profitable.
Breakeven Chargeability = Total Expenses / Bill Rate / Total No. of Possible Hours
If your company expenses for the month are $50,000, you bill out at $115/hr, and have a team of 4 people, your breakeven chargeability is about 68% for the month ($50,000 / $115 = 435 hours needed; 435 / 640 total employee hours in the month = 68%).
So we agree you can’t be below your breakeven, but then why not aim for 100% chargeability? More billable hours = more money right? And more money = …yeah, let’s hold off on that. Think of it this way – if you were 100% chargeable, when would you have time for things like training, business development or even vacation? Well, you’d either not have those things – which are slightly important – or worse, employees would have to do that ON TOP OF their chargeable work, meaning overworked, stressed and unhappy employees.
Worse, maxed out chargeability also runs the risk of making you pass on new opportunities because you don’t have the bandwidth. The best investor in the world won’t make a dime if all their funds are fully tied up in illiquid long-term investments.
Using Chargeability to Make Decisions
You need to find the right chargeability balance that’s above your breakeven, but below 100%. What this number is changes business-to-business and depend on things like company culture, industry, margins and product/service type. When you know your chargeability and more importantly, your target rate, this starts to drive operational decisions.
For example, as your chargeability rises you should consider hiring new employees and becoming more selective of the projects you take on. Or as your chargeability dips near your breakeven it’s time to pound the pavement and start finding new work.
Utilization and chargeability are important concepts in the services world. Now that you know them it’s time to start tracking those metrics regularly and improve the health of your business.