If you bill time, then you’re probably familiar with utilization rate, or the percentage of your employees’ time spent on billable work. In this post, we’ll explain how this metric is a primary driver of revenue and overall profitability as well as the best approach to increasing it. To illustrate this point: If a company of 100 people with an average billing rate of $150 per hour increases their total billable time by just 3%, that organization will make an additional $540,000 in revenue. (Do the calculation yourself here.)
There's a lot of room for improvement.
Average utilization rates for time-billing companies vary by industry. For this blog post, we’ll look at two industries I worked in prior to starting Mosaic: AEC firms and creative agencies. According to Deltek’s Annual Clarity A&E Report, the average organization-wide utilization rate for architecture and engineering firms is 60%. And according to Hubspot, the rate for marketing and creative agencies is also 60%.
To put this metric another way, all you have to sell is time, and on average, 40% of the total organization’s time isn’t being billed. These averages are very consistent year after year, and this number highlights the overall inefficiency of the resource planning process due to the challenges that come with resource planning. Projects never start or finish when they’re supposed to, and it’s a struggle to put together a project team when everything is constantly moving.
While of course non-billable work is required to operate, there is always room for improvement. Your costs—payroll, overhead, etc.—are all fixed, so increases in revenue from increased efficiency go right to the bottom line. In other words, it doesn’t cost more to be more efficient.
Utilization is the lever for profitability.
Prior to Mosaic, I was the founder of two consulting firms and was looking for ways to operate the business more efficiently and profitably. It affected who we could hire, the software and technology we could afford to operate, and even the number of hours people would have to work.
I would review the results of surveys on business performance metrics and analyze which metrics were most closely tied to higher revenue and profitability. One report that was key to helping me understand was by PSMJ, an AEC consultant for improving business performance. For the past 10 years, PSMJ has polled the best firms in the AEC industry as part of their Circle of Excellence, where they honor companies for exceptional financial performance.
By looking closely at how the best firms perform, we’re able to understand what’s achievable. Year after year, the polls show that the median utilization rates of firms that applied were between 59 and 60%, but the best-performing organizations—PSMJ’s “Circle of Excellence” companies—were around 65%. While that’s only about a 5% difference in utilization, the operating profits (as percentages of new revenues) for these excellent firms were nearly double that of the average (30.7% vs. 15.9%). These results are highlighted year after year as shown in the screenshots below.
Screenshots from PSMJ’s Circle of Excellence Benchmark Summary.
The numbers don’t lie.
Year after year, the numbers demonstrate a clear and direct correlation between profit and utilization. The percent profit increase from the lower utilization profit is even higher when taken on the original revenue number. Remember, other than the cost of the software, it doesn't cost more to be more efficient, so the money is nearly all profit. Efficiency is the name of the game in all companies, from manufacturing to software. And for companies that bill time, there is a very clear and direct ROI with increased utilization. So, how do companies achieve higher utilization rates like the Circle of Excellence firms?
From speaking with thousands of time-billing companies, we've learned that top-performing organizations typically have extensive resource planning processes that allow them to achieve higher utilization. It should be no surprise that improving your resource planning process is key to boosting utilization and driving dramatic increases in profit.
The answer is always to make it a team effort.
After reviewing PSMJ’s benchmark summaries and discovering the clear connection between utilization and profit, I spent my time on resource management spreadsheets to improve our efficiency. I started seeing results quickly, but resource planning on spreadsheets was a challenge. They were very complex and weren’t collaborative—mainly because activity couldn’t be tracked. It was hard to get others to update them, and I couldn’t blame them. I was stuck managing them myself.
Mosaic was born to replace what I was doing on those resource planning spreadsheets. A modern version of the process, simple and visual, that anyone can learn it in seconds. But the key is that the software is collaborative, so rather than having one person or a small percentage of resource managers trying to keep up with all of the planning and the constant changes that come with it —everyone plays their part, updating information in real-time. As a group, the organization is working to keep everyone busy.
As a result of this access and transparency, the plans are a lot more accurate, and schedules are more controlled. Departments and office borders get broken down, and the skills of the organization are unlocked. People can easily ask for and offer help to meet deadlines. Resource and staffing managers become true people managers, rather than data entry specialists. They can achieve deeper levels of efficiency with their teams, which improves everyone’s connection to their work and schedules.
Collaborative resource planning is the key to maximizing utilization rates. See how.
Less work, more profit.
Some might be thinking, “We’re already feeling burned out. Why would more work be better?” That’s the beauty of efficiency. The potential increase in billable time simply highlights the inefficiency of the current processes, not an increase in the amount of work. The burnout you or your team may be feeling is more likely due to over-scheduling, conflicting deadlines, and misallocation of projects rather than the work itself. To increase efficiency, you first need to balance your workload.
Increasing collaboration, managing time more efficiently, and planning more effectively result in fewer late nights and weekends, never more. The right resource planning tool can also give you clarity on capacity, demand, skills, and hiring so you can confidently manage the business. It gives you control over your organization’s work, so you can ensure everyone is appropriately busy with the right things at the right time. And by being more efficient, you can actually work less to achieve the same profitability goals.