The Utilization Key Progress Indicator

Utilization is one of the more common Key Progress Indicators (KPI) for a Professional Services firm. Firms will often set the utilization KPI between 65% and 80%, and expect their professionals to spend the rest of the year on non-billable activities, training, holidays, and vacation. While the number of days in a calendar year is a standard amount, there are several ways of calculating the number of possible workdays in a year. It is important to understand the ramifications of that calculation and how it affects the Utilization KPI.

The formula to calculate utilization is # of days worked in duration / duration. For example, if a partner worked 14 days in November, she may have achieved 78% utilization. Alternatively, she may have achieved 73% utilization, depending on the model in use for November 2014. This 5% difference will be critical if bonus accelerators are paid out only if the professional exceeds a billable utilization goal of 75%.


An Average Year

A simple way of calculating the number of days in a year is to define a ‘work year’ as 2080 hours, which is 40 hours * 52 weeks.

2080      total hours available
- 56        regular holidays
- 24        floating holiday
- 160      vacation + sick
- 120      training and company functions

1720 hours

Fig 1. The 1720-hour Average model

A 1720 Average model is very reasonable-looking. There are 10 days of holiday, four weeks of vacation and sick time, and then another three weeks for company functions. There are a total of 215 work days in the year after assumed deductions. At 75% utilization, there are 161 billable days per year. Assuming a utilization goal of 75%, a professional must bill 107.5 hours per month, or 322.5 hours per quarter to reach the utilization goal.


An Actual Year

The alternate method is to use a calendar. This example uses the New York Stock Exchange calendar, which defines 252 working days per year, or 2016 total hours. This includes ten public holidays between October 1, 2014 and September 30, 2015. Under a calendar-based model, a 75% utilization goal would be 189 billable days per year.

Under the calendar-based model, there is also no concept of an ‘average’ quarter. Using the calendar-based model, there are 64 billable days between October 1, 2014 and December 31, 2014. At a 75% goal, that is 48 days, or 384 hours. That difference – between the 1720-based average of 322.5 hours and the actual 384 available hours – is of great interest.

Fig. 2 Comparison of calendar vs 1720 model

A Review Of Time Sheets

As an example, here are the time sheets for four professionals for the current quarter of October through December 2014.

Fig 3. Billable hours

The column “Actual Utilization” is the number of hours worked in the month / the number of potential hours in the month. “Average utilization” uses the 1720 model and treats all months the same with an arbitrary cap of 143.33 hours for each month.

Thus in October, all professionals exceeded the 75% utilization goal. If bonuses are paid on the 1720 Average Utilization model, Josh should be rather happy having achieved 117% utilization yet only billed 168 of 184 actual potential hours.

A Quarterly Comparison

Fig 4. Utilization KPI

The difference is more startling with the quarterly results. While the two Bobs each had bad quarters, Josh has either met or exceeded his 75% billing goal. Under an Actual Utilization model, Jude has not met her goal for billable hours. However, as the 1720 Average model sets an arbitrary cap of 322.5 hours per quarter, she has exceeded her billings goal.


Understanding The Model

There's no right model; there is simply the current model in use at the professional services firm. 

If professionals have individual utilization goals, it is important to understand the structure of those utilization goals. While the calendar model and the 1720 Average model are common, other models are in use. Understanding this allows a professional to know where their high water mark is and thus plan their work accordingly. Under both models, it's possible for the professional to take holiday and still achieve quarterly or annual utilization goals.

It is similarly important for professional services managers to understand the definition of the KPI utilization goal. If the director of Finance and the CFO are expecting to track utilization based on Actuals, it's important to report based on actual results. Otherwise, utilization can be under-reported, making the situation look dire; or over-reported, a problem that only becomes known when the actual billings do not mesh with the utilization KPI.

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