Managing individual contributors based on billable utilization is a mistake. It creates an incentive to inflate hours, a task-taker mentality and unhappy consultants who don’t feel in control of their performance and prioritize output over outcomes. This leads to both poor client margins and poor client experiences, two things that can spell trouble for any agency.
These unintended consequences also degrade client satisfaction and the perception of value, especially when the cost of additional hours is passed on.
The team assigned to the client must understand the client’s objectives to propose valuable solutions, but staff who are solely worried about meeting a utilization target that they feel responsible for rarely take the extra time to gain a better understanding of client needs. Instead, they keep their head down and move on to the next assigned task.
You might be thinking, wait, what about all the big consulting firms where management against utilization targets is standard practice?
Aside from the fact that they have notoriously high burnout for consultants working 60+ hours to make 40+ billable hours, the expectation for long hours is set up front, during the hiring process, the compensation is usually great and career advancement opportunities exist for those who can stick it out.
If you aren’t an agency willing to offer big pay incentives or partner status, you won’t be able to find and retain talent willing to work the hours required to work those 60+ hour weeks.
Ultimately, the error is in placing too much responsibility for client account growth on service team members who aren’t up for the task, either because they are more comfortable taking direction rather than creating it or because they aren’t adequately incentivized.
So, how do you effectively use utilization rate to manage profitability?
Forget about billable utilization; it’s a metric that should be reserved for finance to measure what percentage of hours directly contribute to revenue. Instead, calculate utilization rate based on total client service hours as a percentage of total capacity.
This measure of utilization can serve as a valuable target for balancing workload and as a basis for forecasting available service hours. Utilization actuals can also be used to determine the effective hourly cost of salaried employees. In short, it’s a valuable tool to help management optimize profitability.
Hold management accountable for meeting utilization targets without exposing it to your consultants. Service team managers and any roles responsible for resource assignment should be aware of utilization targets. It is management’s responsibility to ensure that workloads remain balanced and individuals are consistently hitting utilization targets. Overages and shortfalls will happen periodically, but if utilization rates are consistently off in either direction, it will negatively impact the company, either in terms of profitability or employee morale, which can lead to additional hiring costs and client churn. Management’s ability to meet utilization targets should be incorporated into their performance reviews.
Utilization targets are critical. They help agencies manage cost of services, which in turn help agencies achieve delivery margin targets. You should have target utilization rates for individual roles, for your service team, and the company as a whole. Each of these represents a level at which you can optimize profitability.
Set role-based utilization targets that work with your desired margins, service pricing, and the employee salary bands within which you can reliably hire. Since utilization targets by role describe the number of service hours an agency expects to receive, expectations should be set with employees during the hiring process.
Set a utilization target for your entire service team to account for service team management costs and ensure they don’t impact your overall delivery margins. This helps you monitor the impact management changes have on overall profitability.
Finally set a company-wide utilization target to help ensure the organization scales opex salaries and wages profitably as you grow to avoid assuming excessive operating expenses, understanding that there will be points in time where increased operational investment are necessary to fuel the next stage of service team growth.
Changing utilization targets shouldn’t be taken lightly and should not be done as a reaction to poor market conditions or fluctuations in demand. Increasing the service hours expected from an employee without adjusting their compensation will negatively impact employee satisfaction.
Cuts to full-time staff may be necessary if excess capacity remains after contractor hours have been reduced. However, increasing utilization when demand lessens, even if it doesn’t lead to immediate employee turnover, will likely lead to attrition when market conditions improve, undercutting your agency’s service team capacity and ability to rebound. Using partnerships and incorporating contractors into your staffing plan during the “good times” and being conservative with how you extend offers of full time employment even if growth seems inevitable are two of the best things you can do to protect the happiness and productivity of your team in the long-run.
Within these guidelines you can use utilization rate as a powerful metric and target for managing your agency’s productivity and controlling for service costs while maintaining a team-centric approach through clear upfront expectations for service team members.
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