5 Ways Companies Struggle With Utilization Rates and What They Can Do
Within every professional services organization lies greater potential than managers often realize.
For your business to effectively grow, take on new team members, and adapt to the changing market around it, you need to truly understand where your organization’s strengths lie and remove the obstacles that limit it. One of the most effective ways of understanding where your company is being held back is measuring resource utilization rates. Try this Resource Utilization and Revenue Calculator to see the potential impact a seemingly small improvement in your average billable utilization rate could have on professional services profitability – even a 1% improvement could mean millions of dollars in added revenue for your business.
Resource utilization rates reveal where each employee spends their time, the percentage of work hours used on billable time, and how much each person is under- or over-worked in their role. While most companies already understand the importance of measuring utilization rates for the sake of productivity and billing, they still often struggle to correctly calculate rates and make effective decisions to improve utilization and unlock the true power of their workforce.
Where is your company potentially struggling with resource utilization? Find out here.
Why Are Utilization Rates Important?
Resource utilization rates measure not just the amount of time in a workweek that an employee is actively working on a task, but also how much of that time is spent on billable work. Some employees will naturally have more billable time than others depending on the nature of their roles within the organization, but in order to be profitable as a professional services organization, billable hours must be greater than non-billable.
To be clear, no resource can, or should, be expected to achieve a 100% billable utilization rate as this will mean they’re overworked — but setting a goal in the high 70s and achieving and maintaining that rate will mean a more profitable company that only needs to hire or contract when absolutely necessary.
According to research from Service Performance Insight (SPI), the increasing maturity of businesses is interlinked with improved utilization rates, with companies at the lowest maturity level, Initiated, averaging 66.4% employee billable utilization, while those the highest level of maturity, Optimized, achieve a 77.7% utilization rate.
However, average utilization rates across the professional services industry have continued to fluctuate, with SPI’s 2023 Professional Services Maturity Benchmark revealing that billable utilization “went down across the board in 2022. Except for Architecture & Engineering firms, every market, region and sized organization showed lower billable utilization.” As a matter of fact, at 70.7%, the average employee billable utilization rate in 2022 was lower than marks set in both 2021 (73.2%) and 2020 (71.4%), and dipped below the five year benchmark average for 2018 through 2022.
The Top 5 Ways Companies Struggle With Utilization Rates
Improving and maintaining utilization is clearly not an easy task, especially in a rapidly changing market. Here are some of the common challenges businesses face that lead to suboptimal utilization rates.
1. Poor Task Allocation
Task allocation is a skill, and shortcomings in this skill can quickly lead to poor utilization rates across a business. This can be due to inexperienced resource managers, no official processes for making task assignments, or a lack of insight into resource skills and experience. When these challenges rear their head, it becomes more likely that some team members will become overwhelmed with too heavy of a workload while others are underutilized. Often, skills mismatches will delay tasks and leave experienced workers wasting their time on menial tasks.
2. Skills Imbalance
Organizational silos create misalignment between departments and roles, with teams setting the organization up for trouble by not selling what the workforce can realistically deliver. According to SPI, this can lead to a skills imbalance with “not enough or too many people with the right skills, excessive non-billable headcount, sub-par utilization, difficulty in recruiting, ramping, and retaining, and an inability to staff projects quickly and easily.” Maintaining a workforce that is precisely balanced to incoming client demand requires precise organizational alignment, with teams proactively monitoring the sales pipeline for shifts in required skills, and calibrating hiring, training, selling and staffing decisions based on that information.
3. Changing Work Norms
The last few years have seen major shifts in professional services work norms, with the ascendance of remote work as the default state, and with teams spread across states and even countries becoming more common. This has led to the emergence of entirely new ways of working that didn’t exist half a decade ago. While this has helped improve employee satisfaction, it has also meant that work processes have been upended, with many companies having not responded appropriately, acting conservatively in hopes of getting “back to normal” soon. Inefficiency breeds missed opportunities, and this often materializes in poor utilization performance, with project delays and miscommunications leading to lost revenue. If resources become poorly managed and communication breaks down when team members are not in the office together, resource utilization can easily take a hit.
4. Unbalanced Scaling
The process of growing as a company is about so much more than simply adding more employees. When scaling, organizations need to find a careful balance that keeps each individual department at the right size to account for the demands of clients and changes in the market. Unbalanced scaling can easily lead to large fluctuations in utilization rates, with a sudden influx of clients bringing in too much work, or rapid expansions of departments leaving employees without enough work on their plates.
5. The Wrong Technology
Utilization rates may seem fairly easy to calculate – it’s not an especially complex formula. But keeping track of utilization across a diverse, global workforce with unique skills; across multiple ongoing and upcoming projects with ever-shifting requirements and timelines; and across time, with insights on both historic and projected performance is more than spreadsheets or point solutions can handle. SPI’s 2023 Benchmark report puts it well: “Utilization is consistently the most measured key performance indicator but must be examined in conjunction with overall revenue and profit per person along with leading indicators like backlog and size of the sales pipeline to become truly meaningful.”
This need to conduct complex analysis of KPIs that make utilization rates meaningful is a major contributing factor in SPI Research’s long-standing recommendation that “organizations with more than 20 employees utilize PSA.” According to data in the 2023 Benchmark report focused on the value of professional services automation (PSA) technology, these solutions yield several core benefits to professional services organizations (PSOs), “but most executives only need to look to the relative 6% (from 67.6% to 71.5%) increase in billable utilization as a primary reason to select PSA. For a 100-person PS organization, 6% translates to 7,800 more billable hours per year. With average bill rates of $200 per hour, the PSO can produce $1.5mm in incremental revenue!”
While these solutions clearly have massive transformative potential, businesses should evaluate vendors in the professional services technology space carefully. It is important to be on the lookout for solutions that will require heavy customization to meet core requirements like utilization tracking – as companies grow and their processes change, these solutions can quickly become outdated or break, causing more time-consuming complications than the actual benefits they once brought. Because of the unique and rapidly evolving challenges facing the professional services industry, look for vendors with the focus, expertise, and scale to translate those industry challenges into innovative solutions.
How Kantata Can Improve Utilization
As a purpose-built solution for the professional services industry, Kantata is designed to help businesses make the most of their teams by streamlining forecasting and ensuring resources are used more effectively. Kantata helps resource managers understand every possibility and surface best-fit matches for smarter staffing, factor in future pipeline and explore trade-offs, match skills more effectively, and align team member skills with project demands. These capabilities equip decision-makers with the insights they need to improve utilization rates substantially – according to a commissioned Forrester study, businesses using the Kantata Cloud for Professional ServicesTM improved utilization of billable resources by 10%.
Calculate Your Growth Potential
Kantata’s new Utilization and Revenue Calculator is designed to help users understand their utilization growth potential. With helpful insights on average industry performance, this calculator can help you understand how your business can optimize annual services revenue through utilization improvement. Where is your professional services company succeeding today? Where does your true potential lie? Find clarity with our calculator today.