As part of our ongoing KPIs series, we look at Staff Utilization – a key profitability driver for professional services.
- KPIs in Focus Driving Growth
- KPIs in Focus Pricing Strategies
- KPIs in Focus Understanding Staff Utilization
- KPIs in Focus Key Performance Indicators
- KPIs in Focus Business Budgeting
In business, a utilization rate is important 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 period. For example, if 40 hours were recorded in a week but only 30 hours were billable, the utilization rate would 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 divide the billable hours 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 be 32 / 40 = 80%.
Note that with this second method, it is possible to have a utilization rate that exceeds 100%. For example, if 50 hours of billable time are recorded in a fixed 40-hour week, 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.
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 of creative/ graphic design
- 50 hours of development
- 40 hours of content development
- 40 hours of social media
- Ten 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 are allocated by need. For example, content development is needed for about 2 hours a day on average. 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 manage staff utilization efficiently.
To understand utilization, we need to understand how busy everyone is and where they spend their time. For example, how many hours are directly billable to a client? How many hours are administrative – 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 better understand their capacity for additional work or the need to delegate assignments to ease an overwhelmed employee.
The right person, at the right time, is doing good work.
Once we understand employee capacity, we must consider if the work is allocated to the right specialist. The work should match the skill sets. Further, we must consider whether the right person is assigned the task.
Very often, a senior person will handle something that should be delegated to a junior member of 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 skill sets. In addition, the senior person typically commands a higher salary and thus has a greater impact on the project’s profitability. Management needs to access these considerations when assigning work constantly.
Benchmarks by Industry
Providing people with information about their actions in real-time (or something close to it) allows them 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.
Zumifi 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 breakeven 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 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 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 determine whether hiring new staff members is necessary more effectively. Utilization tracking creates a feedback loop for employees, and feedback loops usually produce 10% improvements in performance in every field where they are adopted,
In reality, salaries and benefits are the largest expense item for most organizations. Thus, we must evaluate and manage our staff to ensure efficiencies and appropriate assignments and capitalize on cross-training opportunities.
We welcome the opportunity to help you review your staff utilization – set mechanisms to track capacity, determine the best use of skill sets, and evaluate ongoing staffing needs.