Utilization: An overlooked forecast measurement

Utilization is core business metric that lives in two worlds. While it is promoted by professional services experts and consultants, in practice it is poorly understood in the field, and tough for leaders to integrate into their day-to-day work decisions. By making a quick tweak to your utilization metric, you'll find it more widely understood and used with your clients.

What is Utilization?

First, our obligatory definition. Utilization is defined as the "percentage of time spent working on billable stuff." Utilization can be calculated either the future or for the past. In FinancialForce, past-facing utilization is referred to as “Historical Utilization”. Forward looking utilization is referred to as "Scheduled Utilization."

The calculation usually looks like this:

Billable Client Hours / Hours Available = Utilization

FinancialForce makes some interesting choices about how it calculates utilization. First, the number of hours people have available has some flexibility to it. One can mark projects as "excluded", which means they "wash out" of the utilization calculation. For example, Time Off is typically marked as excluded, which means all utilization calculations happen *after* Time Off Hours are removed from the Hours Available. Similarly, non-billable Projects can be marked as 'Credited', which mean that they will be added to the Billable Client Hours regardless of their billable status. This can be used to give 'extra credit' for internal projects, but is more commonly used to give credit for non-billable work on billable projects.

Utilization is really a Forecast Metric

Generally, a mature professional services organization will have a variety of project types including a good number of Fixed Price projects. This makes Utilization a bit of a secondary forecast metric (as opposed to Milestones which will be your primary building block). That said, utilization still has value in a Fixed Price environment, as it can be used to measure your capacity for taking on new work.

So what's the Problem?

The first problem, as i see it, is that utilization is a percentage. What to do with it? People tend to see utilization as a test score. Is 80% a passing grade? 90%? Of course, it depends on the role and circumstances. Senior people tend to have lower utilization; those who perhaps have been bench-riding will have low utilization as well. What to do with all these numbers, especially since utilization targets vary so wildly from person-to-person and role-to-role?

Organizations tend to plan things in dollars. Our future pipeline and backlog forecasts are doubtless in dollars; our target for revenue is likely also in dollars. This gives us a big hint.

Utilization Transformed

Instead of presenting utilization as as percentage, consider translating it to dollars. How do we do this? Take the inverse of your overall utilization (in essence, the amount of time you have available for billable work) and translate it to dollars. It is critical that this process offset for target - that is, make sure the time left over for billable work is not simply the rest of a resource's unbooked or free time, but rather the time available factoring in their target utilization.

Taken as an aggregate, you’re now able to put a dollar figure on your total capacity as well as your open time! For extra credit, you can slice this figure by role, division, delivery group, or region! In my experience, this will unlock productive conversation within the organization about utilization.