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KPIs in Focus Understanding Staff Utilization

We would welcome the opportunity to help you review your staff utilization – set mechanisms to track capacity, determine the best use of skills sets, and evaluate on-going staffing needs.

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As part of our on-going series on KPIs, we take a look at Staff Utilization – a key profitability driver for professional services.

In business, the utilization rate is an important number for firms that charge their time to clients. It shows the billing efficiency of an individual or a firm. There are two methods to calculate the utilization rate.

The first method calculates the number of billable hours divided by the number of hours recorded in a particular time period. For example, if 40 hours of time is recorded in a week but only 30 hours of that was billable, the utilization rate would then be 30 / 40 = 75%.

With this method, however, it’s easy to see how this utilization rate can be gamed: if a business stops recording non-billable time, its utilization rate will always be 100%.

The second way to calculate the utilization rate is to take the number of billable hours and divide by a fixed number of hours per week. For example, if 32 hours of billable time are recorded in a fixed 40-hour week, the utilization rate would then be 32 / 40 = 80%.

Note that with this second method it is possible to have a utilization rate that exceeds 100%. If 50 hours of billable time are recorded in a fixed 40-hour week, then the utilization rate would be 50 / 40 = 125%.

When we review staff utilization, we look at various factors to determine the efficiency of our staffing.

KPIs in Focus Understanding Staff Utilization

Staffing –

When considering a new project, we look at the anticipated hours necessary to meet the scope of the deliverables.

For example, a monthly contract might include

  • 30 hours creative/ graphic design
  • 50 hours of development
  • 40 hours content development
  • 40 hours social media
  • 10 paid search
  • 20 Management

The project anticipates 190 hours.  This could be one person at 47.5 hours a week.  Or as is most likely the case, specialists allocated by need. For example, content development is needed on average about 2 hours a day.  We wouldn’t typically hire someone to work 2 hours a day.  Either we outsource the function, or determine if we can allocate this person’s time over several projects to justify a full-time hire.  Further, can this person handle other skill sets or be cross-trained and is that the best use of their time?

As this is just one person of many disciplines, it is easy to see the need to efficiently manage staff utilization.

Tracking Time

To understand utilization, we need to understand how busy everyone is and where they are spending their time. How many hours are directly billable to a client? How many hours are administrative in nature – checking emails, preparing documentation, managing staff, etc? How many hours is the person not engaged – either due to a lack of assignment or when waiting for another person’s input before they can proceed?  By tracking activities, we can get a better sense of their capacity for additional work or the need to delegate assignments to ease an overwhelmed employee.

The right person, at the right time, doing the right work.

Once we understand employee capacity, then we need to consider if the work is being allocated to the right specialist.  Obviously, the work should match the skills sets. Further, we need to consider whether the right person is assigned to the task.

Very often, a senior person will handle something that should be delegated to a junior member on the team because it’s easier or quicker than training the junior person.  This is a short-term fix at the expense of long-term gains.  The junior person doesn’t develop new skills sets.  In addition, the senior person typically commands a higher salary and thus has a greater impact on the profitability of the project.  Management needs to constantly access these considerations when assigning work.

Benchmarks by Industry

Providing people with information about their actions in real time (or something close to it) gives them an opportunity to change those actions, pushing them toward better behaviors. Managers can easily translate strategic goals into personal goals by making employees aware of their utilization compared with their peers or providing target utilization rates.

ZümiFi can provide industry benchmarking to help you develop target utilization rates.

Cost of a New Hire

Once it is determined that the current staffing is efficiently utilized and at capacity, we need to consider new hires versus outsourcing.  To do this, we consider the break-even cost of the new employee.

Let’s consider a new junior project manager.  The salary of the position is $ 50,000.  All in costs – benefits and payroll taxes – bring the true cost of the up to $60,000 or $5,000 a month or an hourly cost of $28.85 (assuming 2,080 hours per year ).

This position commands a billable rate of $100. Therefore, the breakeven for the hire is 50 hours (5,000/100) per month.  Anything beyond 50 hours contributes to the bottom line.

Staff Utilization allows you to see how completely your current staff is being utilized, allowing you to more effectively determine whether hiring new staff members is necessary. Utilization tracking creates a feedback loop for employees and feedback loops usually produce 10% improvements in performance in every field where they are adopted,

The reality is that salaries and benefits tend to be the largest expense item for most organizations.  Thus, it is important that we evaluate and manage our staff to ensure efficiencies, appropriate assignments, and  capitalize on cross training opportunities.

KPIs in Focus Understanding Staff Utilization