As a digital agency, you’re selling your time and expertise. Every billable hour matters. You know your team works hard, but without measuring their efficiency, their efforts could actually be costing you. We already explained the reasons why Utilization Rate is so important, so now, you need to figure out how to calculate it. Spoiler alert: there is no one magic formula with all the answers. The right calculation depends on your specific business objectives and some other important metrics too. The good news is you ultimately get to decide.
Each Utilization formula will provide different insight into your business, so here are just a few examples to put you on the right track.
The Basic Utilization Formula
While there technically is no standard formula, there is one used to define the basic role of Utilization Rate — and it’ll help us explain all the others. This basic formula calculates the efficiency of an individual by the amount of revenue they have generated versus the number of work hours available. This is what it looks like:
Utilization = Billable Hours / Total Hours Available
So let’s say John works Monday through Friday for a total of 40 hours a week. Every day, he bills 5 hours to the client, or 25 hours a week total. When his time is put into the handy formula (25/40 = .625), we see that his Utilization Rate is 62.5%.
You can use the same for specific departments, or your team as a whole, by inputting their collective hours.
Changing the Objective
Formula #1 is great for understanding how productive specific individuals or teams are during their working hours over any given time period. But you can look at it another way too; such as how much of their available time they spend on non-billable hours — or basically, the opposite of the original formula. Here it is:
Internal Utilization = Internal Hours / Total Hours Available
This may seem like a measurement of their unproductiveness, but it also could just help you understand how your company is balancing billable vs. non billable responsibilities/ roles.
Now, let’s think about another objective. Let’s say your goal is to understand the amount of time your employees are actually working versus how many hours they are being paid for. This may be impacted by paid time off, holidays, sick days, as well as other unexpected time out of office. That looks a little different.
Time Utilization = Logged Hours / Total Hours available
This specific Utilization Rate focuses on the quality of your employees’ working hours. So if Susan had to leave early for a doctor’s appointment on Friday afternoon, she’s logged 36 hours of her expected 40 hours. That means a 90% Utilization Rate (36/40 = .09) under this objective.
Any time your employees are not working will have an impact on your ability to generate revenue. This type of Utilization Rate can help you better budget for new employee salaries, adjusted client rates, and more to help you stay profitable.
Changing the Capacity
Every agency will have employees that aren’t responsible for producing billable hours. And so there could be significant value in understanding the efficiency of only billable employees. Let’s say your team consists of 3 Developers, 1 Project Manager, and the CEO. Since only 3 of your employees are generating revenue in billable hours, that’s where you want to focus your attention. That looks like this:
Billable Utilization = Billable Hours / Total Hours Available of Billable Employees
Maybe your team also has an HR Manager — aka another non billable employee. This now means only half of your team is producing billable hours. And that may be fine, but if you’re wondering why you’re not making more money month-over-month based only on billable hours, then switching to this Utilization Rate will help you uncover these issues.
Wait, but what if the CEO actually spends half his/her time on billable hours just for fun. Not everything will always be as simple as these formulas suggest, but real data will help prevent real losses, so the more you understand, the better. Metric.ai makes it all a lot simpler, offering total customization options like the ability to split employee capacity into billable and non-billable capacities. Check it out.
Other Factors to Consider
If you want your Utilization capped at 100%, then this will also impact the formula you use. Instead of Hours Available in your denominator, you’ll want to use Logged Hours so that only the amount of time your employees actually worked is considered, like this:
Utilization (w 100% Cap) = Billable Hours / Logged Hours
Now, let’s go back to PTO, holidays, sick days, etc. Should they affect Utilization? Well, if your capacity is reduced over the holidays let’s say, then it will look like your team had a 100% Utilization Rate during that time period (32 Billable Hours/ 32 Available Hours = 100% Utilization vs. 32 Billable Hours / 40 Capacity Available Hours = 80% Utilization Rate). The same would apply to an individual on PTO. While there is no simple answer here, it is important to make sure your other KPIs (Key Performance Indicators) don’t hide the problems that will cost you in the long run. This data should work hand-in-hand with your Utilization Rate to give you a clearer understanding of profit margin.
Your Utilization Rate is such a crucial component of your businesses’ success, but if you’re looking for a simpler way to get all the information you need, Metric.ai can help. Contact us to see a demo today.