I was recently asked by another business owner as to what is “the best way” to measure employee utilization or productivity in his business. In my opinion measuring utilization is the most important strategic metric in the service industry for companies that are engaged in providing IT, engineering, legal, accounting and other service focused work. As a partner at B2BCFO I get the opportunity to work as the CFO with many different companies across multiple industries and this topic seems to be coming up more frequently and urgently. As I listen to the requests, it appeared that the owners were often more focused on the details or mechanics of the calculation as opposed to the results and the benefit of consistently measuring utilization and comparing the current performance to their budget, prior year, targets and other product lines.
Most of my experience has seen utilization rates calculated as total billable hours divided by total hours. The follow on questions usually centered on travel time to clients and vacation and holiday time? My thoughts are those are not critical to the calculation so long as you are consistent across your company. The more important question is if your utilization rate is 70% or 80% are you making money and contributing towards your overhead? Is a particular service significantly more profitable than another because of its higher utilization? Can you switch your focus to more of the profitable service? Why is a particular service significantly less efficient? Can you raise the prices for this less efficient service? Can you de-emphasize this service? How is the monthly and year to date utilization tracking versus your plan?
In my opinion the important question is are you consistently and timely measuring your utilization by employees across your different services areas and using this information to make good strategic decisions. The lesser issue is the mechanics involved in calculating your utilization or productivity rates.