Using Utilization Measurements to Achieve Your Service Business Goals

Part 2 of 2 of last week’s “Leaving Money on the Table” will appear in next week’s issue.

Using Utilization Measurements to Achieve Your Service Business Goals 

By Mark E. Engelberg, TimeLinx

What is Utilization?

Utilization is a crucial metric for service businesses to measure. It helps companies understand how effectively they are using the resources they choose to measure, including staff, vehicles, equipment, tools, and others.  Ultimately, how efficiently they are delivering their services to customers.

Particularly, measuring staff utilization can be challenging as there are different techniques and methods that companies can use. In this article, I’ll identify what staff utilization is, why it matters, and the different methods that companies can use to measure it.

Measuring Staff Utilization

Utilization is a measure of how effectively a company is using employee time. It’s usually expressed as a percentage and calculated by taking the amount of time that an employee spends on billable work and dividing that by the total number of hours that the employee is available to work. See the example in #1 below. This method also works for other resources, too.  Hopefully, you have a system like TimeLinx that is tracking billable hours, total available hours per billable employee, and doing the math in real-time so a project manager can make corrections mid-course.

Why is it important?

Staff utilization is an essential metric for service businesses to measure. A high staff utilization rate indicates that a company is using its employees’ time efficiently, which leads to increased profitability (remember, non-billable work isn’t counted as “worked” time). At the same time, low staff utilization indicates that a company is not using its employees time effectively which leads to decreased profitability (not counting other factors that are outside of service delivery).

In addition to measuring overall staff utilization, companies can also measure staff utilization by individual employees, teams of staff, departments, projects, or project groupings by type, category, or other segmentation. Companies can then identify the areas where the resource may be over or under-utilized and adjust as needed.

What to Measure

  1. Billable hours

Billable hours are the number of hours that an employee spends on work that can be billed to a customer. This is the most common metric used. To calculate billable hours, a company would use timesheets or project management software to track time, with each entry showing a billable or non-billable amount, and sometimes both.

To calculate an example, an employee works 40 hours in a week and spends 30 hours on billable work making the utilization 75% (30 divided by 40).  On a monthly basis, just multiply the numbers by 4.3 before doing the division.

  1. Utilization rate

Utilization rate is the percentage of an employee’s time spent on billable work. This metric considers the total number of hours an employee is available to work, including non-billable tasks such as training or administrative work.  If you have a Capacity Planner in your software, you can play “what if” by moving work among employees and watching the results re-calculate.

If the employee spends all 30 billable hours on billable work, their utilization rate would be 100% (30 billable hours divided by 30 available hours).  That’s service nirvana!

  1. Revenue per employee

Revenue per employee is a metric that measures the revenue each employee generates for the company. This metric considers both the employee’s billable hours and the revenue generated by those billable hours.

To calculate revenue per employee, companies typically take the total revenue generated by the company and divide it by the total number of employees. This gives an average revenue per employee. Companies can also calculate revenue per employee by dividing an individual employee’s billable revenue by their total hours worked.

For example, let’s say an employee generates $100,000 in revenue for the company and works 2,000 hours in a year. Their revenue per employee would be $50 per hour (dividing $100,000 by 2,000 hours).

  1. Capacity utilization

Capacity utilization is a metric that measures how much of a company’s available capacity is being used. This metric considers the number of employees and the number of hours that they are available to work.

To calculate capacity utilization, companies typically take the total number of billable hours that employees could work (based on their availability) and divide it by the total number of billed hours. This gives a percentage of the company’s capacity that was utilized during a given time period.

For example, let’s say a company has 10 employees who each work 40 hours per week. This gives a total available capacity of 400 billable hours per week. If the employees worked 350 billable hours in a week, the capacity utilization would be 87.5% (dividing 350 by 400 and multiplying by 100).

Acquisition Options

There are several methods that companies use to acquire the numbers needed for any of these calculations. The method used will depend on its specific needs and the types of services that it provides to its customers.

  1. Timesheets

The most common method to acquire the data is a timesheet. Spreadsheets or custom forms are still in use today but are clearly at a disadvantage to automation.  Scribbled work orders must first be deciphered and then retyped into a billing system is the most inefficient. That’s double entry – once for the employee, then again for the invoice.

Mobile apps such as our TimeLinx SmartMobile v3 are the rage today.  They make the process fast and easy while reducing errors almost completely. Automated systems always are more accurate and efficient than manual timesheets, but they also are more expensive to license and implement.

  1. Project management software

Project and service management software tools are still not a majority of the market but are being adopted at greater and greater rates. Most have time-tracking capabilities that allow employees to track the time that they spend on identified tasks.

In addition to time tracking, project management software can also provide insights into employee productivity, project progress, and resource allocation. This helps identify areas where employees or other resources may be over or under-utilized and adjust as needed.

  1. Key Performance Indicators (KPIs)

Key performance indicators (KPIs) are another measure of staff utilization. KPIs are metrics that are used to measure progress toward specific business goals.

Reporting

After getting the time details by one of the methods above (and hopefully not by finance staff rekeying spreadsheets!), use your favorite reporting tool to create a utilization report to provide an overview of how much time employees spend on billable work and non-billable work. This then can then be used to formulate and implement a plan to improve the utilization performance.

Summary

Measuring staff utilization is an essential part of managing a service business. By tracking how effectively employees are using their time, companies can identify areas where they can improve efficiency and profitability. There are several metrics that companies can use to measure staff utilization, including billable hours, utilization rate, revenue per employee, and capacity utilization. Companies can use different methods, such as timesheets, project management software, utilization reports, and KPIs, to measure these metrics. By selecting the right metrics and methods for their business, companies can gain valuable insights into how they can optimize their operations and achieve their business goals.

For information about how TimeLinx can deliver all of these capabilities to your business, please contact us at info@timelinxsoftware.com.

# # #

About TimeLinx
TimeLinx delivers innovative project & service management software as a complete solution that perfects the sell-track-manage-support-bill cycle that services organizations must have to delight their customers; TimeLinx brings the cycle together in a single application that offers less frustration, better project management, complete reporting, and improved profitability – all specially designed for Infor and Sage.

Categories