Billable utilization is a key metric that determines the revenue of a professional services organization.
What does it tell you?
It’s the amount of time that employees or partners spend working on billable projects as a percentage of their total working hours.
In this article, we’ll show you how to measure the billable utilization rate and discuss why the billable utilization rate is important. We’ll also provide some tips on how to optimize your billable utilization rate and explain how Rocketlane can help PSA firms manage billable utilization.
You can easily calculate your firm’s billable utilization rate using the following formula:
Billable Utilization Rate (%) = (Number of billable employee hours / Total number of available hours) X 100
For example, if a team member works 40 hours a week, with 30 billable hours, their utilization rate would be:
30/40 X 100 = 75%
But billable utilization shouldn’t be the only metric used to evaluate your team’s performance or the overall health of a company.
You can also use other rates to get more specific data:
The resource utilization rate shows how much employee time is productive and billable:
Resource utilization rate (%) = (Billable hours/Available hours) x 100
Capacity utilization rate measures how close an organization is to reaching its productive potential:
Capacity utilization rate (%) = (Actual output/ Potential output) x 100
Target/Ideal utilization rate represents a company’s ideal utilization to meet its target profit:
Ideal/Target utilization rate (%) = (Resource Costs + Overhead costs + Profit margin) ÷ (Total available hours × Optimal billing rate)
By utilizing several metrics in your assessment, you gain a holistic perspective on employee productivity.
Utilization is just one piece of a larger puzzle. it should be considered along with other important factors such as customer satisfaction, employee morale, and the company's overall financial health.
But what makes billable utilization crucialt?
Let’s find out.
Billable utilization rate tells you much more than just how profitable your employees are. While employee profitability is important, billable utilization rate also:
Billable utilization rate can be a widely useful metric if you know how to analyze it. But before you begin, it's worth exploring an optimal billable utilization rate.
It’s easy to believe 100% is the ideal billable utilization rate.
But is this the case?
Not exactly. Many companies aim for a 70-80% billable utilization rate.
High utilization rates (80%+) may indicate that employees are being overworked and risk experiencing burnout.
It’s particularly important for firms to strike a balance and maintain an optimal billable utilization rate. This can be done by regularly monitoring and evaluating team utilization and adjusting as required.
It’s important to note that both overutilization and under-utilization can be detrimental to a company’s productivity and profitability:
So how do firms get it right?
There are three common approaches, each varying in terms of their complexity. Firms measure billable utilization by:
Your approach needs to be company and industry-specific. You don’t want to charge clients for more hours than they can pay. But you also need enough billable hours to meet your profit margins. Here are some ideas to guide you.
Billable utilization is the amount of time a company’s employees spend on work that can be directly billed to its clients.
Having a high billable utilization rate means that an organization can generate revenue from a large portion of its team members’ time, while a low billable utilization rate indicates that the organization may be underutilizing its team resources.
However, effectively managing your team's resources is no easy task. Many professional services organizations struggle to make the most of their limited resources and budgets to complete projects successfully.
In many cases, project managers bear the brunt of the difficulty in allocating resources strategically to ensure optimal billable utilization and profitability without overburdening teams.
But there are several steps you can take to optimize your company’s billable utilization rate. We’ve summed up the most important practices that can help you in this regard:
It's important to note that improving billable utilization should not come at the cost of burnout or client dissatisfaction. Therefore, companies should take a holistic approach and consider all other factors while changing policies or making decisions to improve billable utilization.
It’s also important to manage and track these changes effectively. Ideally, using a state-of-the-art management platform.
Rocketlane is a PSA software that can help manage billable utilization by automating time tracking and project management processes. It can help firms to keep track of billable hours and identify areas for improvement.
In a recently published report by SPI, even a 4% increase in resource utilization can generate the revenue required to invest in a dedicated PSA - Professional services automation solution like Rocketlane.
Rocketlane can help professional services firms track and optimize their team’s time, manage projects more efficiently, and make data-driven decisions to improve billable utilization.
Here are some specific ways Rocketlane can help you manage your organization’s billable utilization:
Getting your billable utilization right maximizes profits and keeps your staff engaged. While billable utilization isn’t the only metric to consider, it’s still one of the most important.
So if you’re looking for a way to maximize your team’s billable time while ensuring they aren't running the risk of burnout, Rocketlane is the software for you.
Our project management tools provide the data you need to calculate your utilization rates. In addition, Rocketlane’s resources management features help allocate employee time appropriately.
Book a demo with us today and see it all in action!