In the dynamic world of Professional Services (PS), businesses are always seeking effective strategies to optimize performance and profitability. One crucial yet often overlooked aspect is the concept of ‘Utilization’. Let’s demystify this term and delve into its importance.
Understanding Utilization and Its Significance
Utilization is the measure of total talent capacity available to the business for project-based work. Essentially, it’s a lens through which we can see how efficiently resources are being used. But why is it so important?
When we combine Utilization with internal cost structure, we can reveal a multi-layered picture of profitability. This can be assessed:
- By Resource: Analyzing utilization on projects by resource level cost helps identify how much profit a resource contributed in comparison to their overall costs.
- By Project: By factoring in the utilization and associated cost of different resources used in a project, we can determine the profitability of that project.
- By Offer: As we deliver multiple similar projects, we can factor in training time and standardize expectations for utilization and profitability.
- By Business: When resources, projects, or offers consistently hit utilization targets and are profitable, the business is likely to be profitable as a whole.
The Multifaceted Benefits of Utilization
While profitability is a direct benefit, Utilization offers insights beyond just numbers. It serves as a crucial tool to prevent employee burnout. When utilization rates start to exceed 100% over an extended period, it’s a clear indication that resources may be on the brink of burnout.
To illustrate, consider a software development firm with employees consistently logging in over 60 hours a week. This would show up as an over 100% utilization rate and may indicate potential burnout. On the other hand, if utilization starts to drop during downtime or between projects, it could be an opportune moment to focus on internal initiatives or training.
Moreover, Utilization also sheds light on our capacity to undertake new projects. Low utilization rates mean we can start new projects promptly, whereas high utilization rates might necessitate setting client expectations about slower project commencement or possible delays.
Beware the Ghosting Hours: A Cautionary Tale
However, it’s essential to be aware of potential pitfalls in tracking utilization, such as the phenomenon known as “ghosting hours.” This refers to when resources work on a billable project but don’t track the time, thereby creating an illusion of higher productivity or project profitability.
Imagine a project manager in a consulting firm who works 50 hours on a project but only records 40 hours to make the project seem more profitable. This can have severe ramifications. The business could end up overselling its capabilities, underdelivering on projects, and even unknowingly pushing its resources towards burnout. Leverage the best practices from our previous blog, financial management communication best practices, to encourage employees to not ghost hours.
Equipping Your Business with the Right Tools
Despite the importance of utilization, some PS businesses still shy away from tracking it, mainly due to lack of a method or an unwillingness to make resources track their time. However, the market is flush with tools designed to make this task effortless.
Time tracking solutions range from simple tools like Toggl and Harvest, suitable for small businesses, to sophisticated Professional Services Automation systems like Monday.com and Zoho Projects. Selecting the right tool can significantly simplify the process of tracking time, making it easier to calculate utilization and build a predictable, profitable business.
In summary, tracking utilization is an invaluable strategy for PS businesses, serving not only as a profitability indicator but also as a key tool to monitor burnout, plan future projects, and overall, run a predictable and profitable business.
Jack Draeb is a Senior Consultant with McMann & Ransford who has experience working with Fortune 1000 companies to identify issues, define solutions, guide change management, and deliver lasting results.