Utilization is a critical metric meant to measure the percentage of time purchased from a given segment of employees in an agency that have been utilized for revenue-earning activities.
This metric provides an accurate lens for leadership teams on how efficiently their labor is being used to earn revenue for the company, after accounting for the cost of time-off, holidays, non-delivery time and non-delivery employees.
Unlike alternative forms of Utilization measurement such as Billable Utilization, Resource Utilization, Capacity Utilization, Productivity Utilization etc. Utilization does not consider non-delivery time in the numerator, nor does it subtract time off, holidays or non-delivery time / employees from the denominator.
It also takes into account how many hours were spent on Client Delivery regardless of whether or not they were billed to clients or affected how much the client paid.
This ensures that this measure of Utilization is accurate and horizontally consistent in reflecting the proportion of purchased capacity that is earning revenue in a given period of time.
Formula Example:
Utilization = Delivery Hours x Gross Capacity
Why it matters for agencies
Utilization is one of the most critical metrics when it comes to monitoring and improving profitability in any service-based business model. Because service-based business models are entirely predictated on purchasing time from employees in bulk, and re-selling that time at a profit to clients.
Any time that was intended for revenue-earning activity that goes unutilized represents both a cost to the agency, and lost revenue and profit opportunity.
Here’s why Utilization Matters.
- Increases profit potential: The more utilized an agency team is, the more revenue it should be able to generate (assuming Average Billable Rates remain consistent)
- Managing team workload: Understanding both what a realistic Utilization goal, and actual Utilization rates look like can help management teams prevent their teams being overworked.
- Modeling revenue & capacity: Combined with Gross Capacity and ABR, firms can easily model how changes to their team, targets or pricing impacts their profitability and their ability to earn revenue or take on client work in a given period of time.
- Enables hollistic profit management: Utilization enables executive teams to go beyond Project Profitabilty, and also consider how the business of their team influences profitability, leading to a more complete and balanced approach to profitability management.
How to optimize
Optimizing Utilization requires having a solid understanding of Gross Capacity, Overhead Allocations and Time tracking.
Here’s how to make it work:
- Understand your Utilization ceiling: Set utilization targets for each individual on your team by taking into account how much time they are expected to spend on non-delivery activities, and how much time off they are expected to take. You can arrive at a utilziation target for a given segment of your team.
- Forecast Utilization: Maintain a forecast of how much work is upcoming compared to your capacity, so you can stay on top of right-sizing your team to the work that is available.
- Track all delivery time: Ensure you have a way to keep track of how much time is being spent on delivery, whether that’s using timesheets, resource plans or other alternative time tracking or time modeling methods.
- Train management team on Utilization: Ensure the teams responsible for making staffing decisions and bringing in new business understand and have regular insight into Utilization forecasts and actuals. Hold them accountable to making sure the agency is appropriately staffed based on how much work is incoming.
- Avoid exposing to individual contributors: Unlike managers, Individual contributors can’t make decisions to hire or fire team members, or bring in new work. Exposing and holding them accountable to Utilization rates tends to be both counter-productive and creates negative incentives, often leading to inaccurate time reporting.
Adopting Utilization forecasting and tracking can take some investment, but is critical to ensuring the most important resource and cost in the firm (people and time) are managed in a way that sets everyone up for success.
Resources to Explore
- https://parakeeto.com/blog/the-three-immutable-laws-of-profitability-ep-178/
- https://agencyprofitpodcast.simplecast.com/episodes/mastering-utilization-and-capacity-planning-for-agency-profits-with-marcel-petitpas
- https://parakeeto.com/blog/utilization-rate-calculator/