01 Nov Utilization: Billable vs Unbillable
Mike Harvath 00:09
Hello and welcome to this week’s Shoot the Moon podcast broadcasting live and rec from revenue rocket world Headquarters in Bloomington, Minnesota. As you know, revenue rocket is the world’s premier growth strategy and m&a advisor for IT services companies. With me today are my partners Matt Lockhart and Ryan Barnett. Welcome, gentlemen.
Matt Lockhart 00:32
Hey, Mike, good to be with you.
Ryan Barnett 00:36
Thanks for Thanks for having us today. You know, each week, we try to focus on something that has been impactful in our lives in the last few weeks and in something that has always been on the mind of our customers, really comes down to the word utilization and utilization reports, and monitoring and measuring utilization. And whether you think it’s a simple metric, or a complex one, it’s something that you run into all the time. So today, we’re going to really dig into utilization and see, see what we can find and give some advice on what IT services companies should look for in using this all important metric. So, Mike, just helped me out just let me help me understand what is what is utilization? And are there any variations, for example, but a managed services company, perhaps use realization versus utilization? But what is utilization?
Mike Harvath 01:32
Yeah, so a little bit of a primer. And a reminder for everybody here on the audience, I’m sure most of you closely monitor your utilization of your billable staff. But this has to do with exactly that. How essentially billable are they? And there’s a variety of variables that go into that calculation. But in short, you want to maintain a high utilization number. That means that you’re efficiently staffed effectively staffed for the demand in your business. And that you’re, you’re billing your resources out and to bring up, you know, Brian, you bring up an interesting point, which is for subscription based businesses. And that can be for, you know, infrastructure managed service providers, or even app implementers, or custom development guys have a managed services function to do support and maintenance of C projects they’ve worked on in the past, realization becomes a much more important analysis, which has to do with how realized as your staff, visa vie your level of billing, and we can talk more about that in a bit.
Ryan Barnett 02:46
So you start with this, this is a metric that most people are tracking. Why is that a What’s the utilizations impact on profit?
Mike Harvath 02:57
Well, utilization, you know, there’s a direct correlation between how how you, you your staff utilization is visa vie the cost structure associated with maintaining that step. So, when you think about that, you know, your most of you, I wouldn’t say all of you that are probably listening, but most of you don’t have a variable cost model associated with utilization. That’s one for one direct correlation. I know some firms do operate that way. But most firms don’t, most of their consultants are, have salary and benefits. And maybe they have some incentive comp built in. But that cost is fixed. And so if utilization are the billable work that you do revenue that you do for your clients falls under a particular utilization percentage against that fixed cost of your delivery team, you know, you’ve come unprofitable, right. And it’s interesting, because those lines tend to cross sort of in the in the mid 60s, percent utilization, where you’ll move to losing money on your on your consulting team. And so, you know, maintaining high utilization is important, we think a target of about 80% based on a 2080 year is 80% or more is kind of the right number in order to kind of optimize the mix between not burning out your staff if utilization is too high, and yet maintaining, you know, a good good amount of profit contribution from the solid amount of profit contribution from the billable staff.
Ryan Barnett 04:29
That makes sense, Mike, Matt, I’d love to get your insight here. You threw out a number here of just 80% Matt, I love your perspective on the calculation and what what should we calculated and some of this gets into a bit time tracking and project tracking but help me understand a little bit about how the best practices in just tracking that number compared to the to that 20 At work, what’s in what’s out
Matt Lockhart 04:59
Well, to Mike’s point in understanding that utilization against your fixed costs, so let’s kind of even back up even further, let’s kind of go to the basics as to what drives profit within a services organization, right? So you’ve got your fixed cost your cost of personnel, right? And then you’ve got your bill rate, what you are going to build that those in dividuals, out out, right, and then you’ve got this variable thing called your utilization. Okay, so assuming you’ve got, you know, your pricing set appropriately, so that with the assumption that you are hitting a floor of utilization, then you know that you are driving an appropriate gross margin on that individual. And, and or the grouping of individuals within within a project. Okay, so, and to Mike’s point, a very good baseline is 80%. And you know, that, again, with your fixed costs being known, and your bill rate being known, then driving an 80% utilization is going to meet the appropriate gross margin goals that you need to continue driving your business forward. Now, that doesn’t mean that you can’t build more or be or utilize them that is just that this is sort of the the, the parameters that you’ve set for your acceptable gross margin percentage. Okay, so then you say, Okay, well, if that’s the case, we’ve got all of these other things that consultants and you know, the personnel can, you know, apply time towards, you know, they’ve got vacation, they’ve got sick time, they’ve got some level of administration administrative time, and they’ve got some training time. And all those things are obviously very valuable to the health of the of the employee and an ongoing relationship against the 2080 hours, which is just sort of standard baseline of 40 hours per week, 52 weeks per year, you need to track to that 80% against that 2080 hours. I don’t have my calculator in front of me. But if I remember correctly, it was 17 170 hours. And that represents appropriate, approximately, you know, 80% utilization, or 80, somewhere in between 80 and 85% utilization, a lot of people have sort of this misnomer, and oftentimes, you know, with maybe smaller, you know, less mature services organizations where they think, Okay, well, I’ve got to remove out all of the training time, and I’m going to remove out all of the administration time, and I’m going to remove out all that personal time off, and then I’m going to apply 80% against that. And that’s, that’s that’s the wrong equation. The correct equation is to apply 80% against all of the the available hours.
Ryan Barnett 08:25
If I if I hear that, right, you’re essentially saying that has to be a lack of better billable hours, you’re going to have to realize some kind of revenue or some kind of work attributed to the revenue that’s coming in against for that time. Is that right, Mike?
Mike Harvath 08:42
Yeah, absolutely. You know, and I think it’s easy to talk yourself into or begin to believe to Matt’s point that, you know, well, but these guys can’t really control that non billable time, like if you’re going to do PTO, or training or administrative or blah, blah, blah. And in essence, that’s not how this the best in class approach to this equation works out. As you can imagine, if you did that your billable utilization minimums would have to go way up to 90 plus percent. In some cases, more. Most organizations, I’d say the best organizations use, you know, what, 2080 hour sort of basis for their 80% utilization. Oftentimes, they provide incentives for higher utilization. Some provide incentives above 90% utilization. Some projects require that it’s a great way to take care of your staff when they’re, you know, working kind of extra billable time, if you will. Now, we should know that 80% math point is not the floor of utilization. We know many organizations are run at very profitable ones that run at north of 90% utilization consistently, and they usually share in that what I’ll call start additional utilization above some targets on target that at 85 or 90 or 95%, they begin to share in those additional dollars that are created on that upside utilization because keep in mind, their costs are fixed, those staff costs are fixed. So the more utilization translates to the more profit ability for the business. And I think most consultancies wind up wanting to share that, as a bonus or reward to their staff for putting that extra putting in that extra effort, that extra time that’s required to really, you know, serves a client and meaningful way and may just have to do with where they are in the project cycle or based on things that have come up that need to get done on a certain timeline. And, you know, it’s super important that you’re also looking for and managing your staff and their ability to perform at a high level when you begin to get into those north of 90% utilization times because there is still administrative work that needs to be done. And there are still things around the edges as it relates to timekeeping and management, and just in general good, you know, corporate hygiene that can slip if utilization rates get began to get too high for delivery teams.
Ryan Barnett 11:18
I would imagine that if you’re running a team closer to 100%, oftentimes you’re you’re you’ve got to be wary of things like burnout, or to your point, administrative duty, duty is not fulfilled there or not even perhaps not even enough training. And, there’s ways to bring that back in line. What happens? What do you do when the utilization is under that floor? Let’s say you set a floor at 70%. And your team is under under that? What kind of steps does a company need to take?
Mike Harvath 11:53
Well, certainly, you need to find more work for the team you have, in order to increase billable utilization as quickly as possible. Or, you know, you have to rush as a team, you have to, you know, size the team to the work, it’s always a challenge to maintain sort of optimal utilization in a business. And in most cases, optimal utilization. A big part of that is being able to have enough sales velocity and pipeline in order to keep the team that you have on staff working in bull. So, you know, if your marketing and sales function which is directly correlated to this is not optimized, oftentimes you can have lumpy utilization, or it can impact your profitability, it certainly will impact your growth. You know, we often say don’t confuse sales with delivery. And I think most organizations that get it right, get a good cadence going on sales, and marketing, and continue to sell into new work. And then they grow their delivery team as appropriate, based on a variety of metrics that are measured, one of which is of course utilization, that makes sure that they’re appropriately staffed for that workload, that’s a much easier and more palatable thing to do than be cutting delivery staff because you’re unfortunately not able to keep them busy.
Matt Lockhart 13:22
Yeah, I think that’s a really excellent point, Mike, the context of don’t confuse sales and delivery, as you’re managing the business at an executive level, and you’re forecasting. I mean, a general principle is, as you always want to oversell against your capacity, is even in these tight times where talent is difficult. And, you know, as long as you’re good at client management, you know, you’re you’re, you’re just able to stay highly utilized over time, by over selling your capacity and by capacity. I mean, that’s your overall will staff, you know, opportunity based upon the size of your business today. So general principle at a macro level, oversell against your capacity, and then grow into it with the amount of people and continue to oversell against the capacity at a at a sort of a micro spot level, there’s always opportunities to ask the client to do more. There’s always opportunities to apply resources against multiple initiatives or multiple projects. If one project is going through a slow period. I mean, there’s just tips and techniques, you know, call it the art of managing utilization to keep your utilization.
Mike Harvath 14:53
Yeah, I would agree, Matt. I would say that certainly the a well run team that has the tools and visibility to utilization and future utilization can size and grow accordingly. It’s sometimes easy to fall into the trap that we can’t sell it until we have staff that we can bill against. And that is the wrong decision. Typically, typically, you’ll always want to sell ahead of delivery capacity and then hire. But that means that you built a pipeline of people that you can hire. So you have to actively be recruiting and having hiring discussions and talk to people about coming on board when the time is right. Because if you sell out a capacity, and you do not have a pipeline of future consultants to hire that you’ve had active discussions with, you’ve kept warm, it’s too late. And you may need to push projects off to the point where a client won’t want to start 90 days from now or 120 days from now. Because you know, they want to move faster than so we think there’s a little bit of art here and your ability to you know, do staff management, have contingent workforce resources that may be you know, either contractors or hourly type folks that can fill gaps, and that you have certainly a long a significant pipeline of potential hires, as you kind of oversaw capacity.
Ryan Barnett 16:22
Yeah, that’s, that’s a little bit specific questions. But I think might this might be good for you. If you have a manager who’s managing a team of people, what are some guidelines around their utilization? What rate? Do they? Are they no longer billable? Because we’re doing management teams? And what kind of percentage should they be looking at for utilization, when it comes to team management? And other functions that may be inclusive of keeping a high functioning team running Well?
Mike Harvath 16:57
Yeah, you know, I, I’ve used the rule of thumb over the years, I know they can vary a little bit, either side of this. But generally, a rule of thumb that I’ve implemented successfully, and I know many of our clients have is that, you know, there’s a very simple rule of thumb that says, Look, if it’s just you, your utilization expectations, as an individual consultant, have to be north of 80% of utilization. If you’re managing a team of up to 10, people, you still should be able to bill about 50%. And if you go to 20 people, that’s when you shouldn’t have any necessarily any billable utilization expectations. Certainly, you can bill and you know, as you can manage it, there’s no, you know, no harm, they’re putting in some billable time. But once you’re managing a work unit of 20, consultants, you have, you have a lot of work to do as it relates to mentoring and management. And again, I’ll come back just to good corporate hygiene, which has to do with making sure Time reports are getting in making sure they’ll see that staff was taken care of from a development perspective. And, you know, filling in for people that may be out or things that need to be met. So, you know, generally it’s sort of declining slope from, you know, your full billable utilization at an individual contributor level to about half of that number. If you’re managing a team of 10, down to zero, if it’s 20 or more. Now we have you know, seen practice leads and team unit leads manage more people in unbuilt, generally, if you’re able to do that you have very, very effective tools with very effective team members. And it is possible to do that. But in general, on a kind of rule of thumb basis, we sort of think you’re, you can be off the organization can afford you and you’re off the hook, I’m filling out about 20 resources are being overseen by. I think it’s critically important for organizations to understand team utilization weekly, and monthly, and quarterly. Understanding micro trends at a minimum of weekly helps you spot potential issues. Looking at them more at the macro level, monthly and quarterly gives you more kind of longtail trend analysis. We know some organizations that look at utilization of the team’s daily, right, depending on the tools that you have in place and the sophistication of that and the level of oversight. It’s pretty, you know, easy to do that. But I think you do have to have a steady hand on the tiller when it comes to managing teams and utilization. And if you get in some ways, it’s more art than science, but you have to, you know, make sure that the team stays utilized but at the same time don’t overreact to members of the team that may have, you know, commitments outside of the office or beyond top PTO or, you know, you’re gonna need to look at these numbers and take them in over a little longer period of time in order to make good sense of them. Generally, though, you know, you need to always remember that, you know, these utilization numbers directly impact organizational profitability is a direct correlation. You know, your SG and a costs are fixed, your cost of labor associated with this consulting team is fixed. So the variability comes in the billing, right, and the billing is directly correlated to the billable utilization, and our realization of its subscription revenue, like we talked about earlier. And you know, how that staff is utilized or realized against the billing, you know, impacts back to the organizational profitability. So, being able to be effective at you know, what levers you’d pull to optimize that utilization, how you staff that utilization, and not letting leakage occur either which we didn’t talk about. But it’s important that your consulting teams capture all of the time in all organizations that I’ve managed and seen, there’s leakage, meaning there’s consultants that put in time that they don’t build for, because they just think what’s the right thing to do for the client, or it’s too big of a hassle to capture the time. And so it’s important that your time capture systems are easy to use and are very well ingrained into your team. Because 20 minutes here and an hour there or two hours here, two hours there begins to add up and it negatively impacts your ability to bill for the time when in reality you’re doing the work and that’s even sort of a double whammy.
With that Mike, that’s all the questions I’ve got for today and I’ll turn it back over to you to close it up.
Mike Harvath 21:55
Alight guys, thanks a lot. Appreciate it. For you joining me on this topic. I’m utilization this week was Shoot the Moon podcast but that will tie a ribbon on it. We thank you for tuning in. I hope that you will tune in next week for more topics around m&a and strategy as it relates to your IT services company. And hopefully you’ll get a few tips and tricks today that are helpful and managing and running your business. Thanks again make it a great week and I look forward to tune in with us next week. Take care