One of the key metrics (and sometimes only metric) used to evaluate the performance of billable staff in a professional services organization is utilization expressed as a percentage of available hours.
The simple formula could be utilized hours / available hours.
But what assumptions are used to calculate these two variables? There is no right or wrong answer but the following should be considered (and the ERP system used to enter and bill time should be able to support these).
Available hours
- Part Time, Full Time and Casual Staff have different work hours and this should be reflected in the calculations?
- Should sick, personal and annual leave be included in the available hours?
Utilized hours.
- Are only chargeable hours to be regarded as utilized?
- Should approved internal activities such as development and pre-sales work be considered utilized?
- Should Travel (both billable and non-billed) time be considered utilized?
- How should utilization be calculated on a fixed price job, simple budget / hours placed against job or should it be first in best dressed until the budget is reached?
With these assumptions taken into account, a percentage utilization should be able to be calculated. Be offering this information real time in a clear and transparent manner embedded in an ERP system this simple calculation can provide good feedback and a benchmark for the performance of your billable consultants in a professional services firm.
Hi Duncan,
ReplyDeleteYour suggestions on Utilization are very true. Most ERP metrics are not setup to handle some of the actual labor hour categories that you have discussed.
The effort to extract directly charged hours and dollars to a Work Order/Job or Project from many Payroll systems is more difficult than it seems.
Typically, it may require more disciplined time reporting than a company is used to reporting for Payroll purposes.
The only time that I have seen this done correctly is when Production Labor Reporting fed the Payroll directly, so that these different categories can be segregated.
Given that many manufacturers struggle to maintain accurate on-hand balances, granular labor/payroll reporting requires the enforcing of discipline by a companies management.
I am consistently surprised at the
un-willingness of many companies management to manage their employees’ labor reporting.
Personally I agree with the blog comment and also the follow up by Michael Brunswick.
ReplyDeleteOne of the difficulties in Utilisation reporting is that the immediate needs of the various stakeholders are first of all different from each other and second of all variable over time. For example, the organisation as a whole may be focusing on revenue one year, then shift to gross margin another year, then to profitability another year.
Also, no matter how you make that calculation, there is always someone in the organisation who considers it more valid to calculate a different way. For example, a long term strategist may weight the calculation in favour of internal projects and non-billable work in the interests of building customer satisfaction and loyalty, while a venture capitalist may weight the calculation on solely those measures which present the maximum perceived "value" to potential buyers of the company.
I would hope that many different scenarios are considered by a consulting organisation's management before arriving at a method of calculating utilisation. I also understand that the ease and simplicity basing it solely on billable dollars can reduce ambiguity and give everyone an easily understandable platform on which to work out where they stand. Not saying it's right, just saying I understand how it could come back to that.