What is resource utilization? How to calculate it and key benefits for professional services firms

What is resource utilization?

Simply put, resource utilization is a metric that measures the utilization of your available resources.

It shows how effectively and efficiently resources are being used over a period of time by comparing hours spent on billable and non-billable work.

This helps project managers and professional services leaders with their resource management by helping them to understand and enhance the productivity of their teams and shows them where staff may be over or underutilized.

This isn’t just important for ensuring the success of projects overall, however. It’s also vital for ensuring your staff are happy and not overworked (which comes with its own hosts of risks that can be detrimental to your business—but more on that later).

Before we dive straight into how to start calculating resource utilization, it’s important to understand some of the key concepts of resource planning (and get any confusion out of the way):

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Billable or non-billable hours - what's the difference?

Billable hours are the bread and butter of professional services firms. They’re the hours of work you spend on project activities that can be billed directly to a client. This typically consists of tasks, milestones and deliverables that have been agreed between you and your client.

Non-billable hours, on the other hand, are more like the vegetables of professional services firms: they may not be as exciting, but they’re still extremely important. They’re the hours spent on tasks that cannot be directly billed to a client. This can include business development, IP and services development, annual leave and other unclassified activities such as administrative tasks.

In summary, if you’re not charging a client for the time spent on a task, it’s non-billable.

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Resource utilization or resource allocation - what's the difference?

Resource allocation is—you guessed it—all about deciding which resources to allocate to each project and the tasks they will undertake. This involves assigning specific tasks to team members to allocate the workload necessary for effective organization and planning of professional services projects.

On the flipside, resource utilization differs from resource allocation in that it is a KPI that measures the productive or billable time of your resources. In other words, resource utilization is a performance measure of effort over an amount of available time or capacity.

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The different types of resource utilization

Now that we’ve got those key concepts out of the way, let’s take a look at some of the different types of utilization you can measure.

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Chargeable or billable utilization

Billable utilization measures the amount of effort a resource spends utilized on activities that are billable to the project (and client) against their available time or capacity.

Professional services firms will typically have a target utilization they would like to achieve across their consultants, and in monitoring this essential metric, they can keep a keen eye on the profitability of the business.    

Non-billable hours utilization

Non-billable hours utilization measures how much time a resource is spending on non-billable hours against their available time or capacity. Non-billable tasks are a cost to the business, so this is an important measure to analyze at an individual, role or team level to ensure they are focused on value-adding activities and not wasted as “bench” time.

Productive utilization

Productive utilization is the effort expended on non-billable activities that are considered to be essential to the ongoing sustainability and growth of the firm such as business development, IP and services development, or strategic projects designed to accomplish long-term objectives for the business, e.g., expanding into new markets. Most firms would expect their consultants to contribute to these activities as part of their own personal development and contribution to the business, when not working on chargeable client projects.

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Why is resource utilization important and why should you calculate it?

So, you now know what the different types of resource utilization are. But why should you care?

Let’s delve into the key benefits—and practical implications—of resource utilization in professional services firms and find out why it’s important to calculate.

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Maximizes productivity and efficiency

Resource utilization can have a significant impact on productivity within your firm. While properly utilized resources can significantly improve the efficiency of your staff, underutilization and overutilization can cause adverse effects.

Underutilization of resources will ultimately impact the profitability of the business.  If the revenue generated from billable work does not exceed the costs of the resources plus other operating expenses, then the firm will not be generating enough profit to sustain it in the long term.  

It can also lead to boredom within the team. Without sufficient work to keep them engaged and utilizing their skills, staff may feel unmotivated, undervalued, and disengaged. This again can have a detrimental effect on both productivity and staff turnover, as unhappy employees may seek out more fulfilling work elsewhere.

Properly utilized resources, however, can transform productivity. When consultants are allocated the resources and tasks that match their skills and capabilities, they’re able to make meaningful contributions, which ensures they feel motivated, valued, and engaged. With a balanced workload and appropriately managed resources, employees feel enabled to work at their best without compromising their well-being.

On the other hand, whilst overutilization of resources in the short term can drive higher margins, it can also lead to burnout within the team if sustained for too long. Without sufficient staff and resources available to deliver projects, your people can become overwhelmed by excessive workloads and tight deadlines.

This can make it difficult for staff to maintain focus on tasks and deliver high-quality outcomes, leading to errors and diminished overall performance. As well as affecting the health of your business, this can affect the health of your staff, too—leading to stress, a reduced work-life balance, and ultimately a decline in job satisfaction.

This doesn’t just affect your FTEs, either. Hiring managers of professional services firms have started to notice a shift in the types of topics candidates are asking in the hiring process. There’s a greater emphasis on sustainability, culture, and work-life balance—chiefly, managing burnout. If consulting firms can’t prove they’re adapting to these cultural shifts and addressing issues like burnout, they may not be able to close candidates.

Improves planning and decision-making

Resource utilization plays a pivotal role in the planning and decision-making of professional services firms. Having a good understanding of your underlying utilization performance and future forecast can provide business leaders with valuable insights, empowering them to make better informed decisions and ultimately create robust plans that drive success.

Access to reliable resource utilization data empowers professional services firms to collect essential data about resource availability, capacity planning, and performance—all of which serves as a foundation for informed decision-making. With this invaluable data, professional services leaders can evaluate the impact of resource utilization on project outcomes and adjust strategies accordingly, making proactive decisions that align with the overall goals.

As this resource utilization data guides the scheduling of resources, planning also becomes more accurate. By analyzing crucial trends and patterns, you can begin to accurately predict future demand (and potential bottlenecks). With a clear understanding of resource capacity and constraints, you can create realistic and achievable project plans, which reduces the risk of delayed projects, resource shortages, and budget overruns. That means improved project outcomes and happy clients.

Increases profitability

Last, but certainly not least, is the overall financial success that resource utilization can deliver to firms. Effectively managing and optimizing resources ensures they’re used to their optimal potential, which generates the highest possible return on the firm’s investment into their human capital. With efficiently utilized and focused resources, professional services firms are able to deliver exceptional value to their clients, which ultimately leads to repeat business, positive referrals, and a growing client base.

Effective resource utilization also promotes accurate project pricing and fee estimation. By applying historical resource utilization data, professional services firms can better estimate resources needed for similar future projects. This prevents under-quoting, which ensures profitability by accounting for all necessary resources and their associated costs.

The analysis of resource utilization patterns can help project managers identify areas of inefficiency, allowing them to eliminate wasteful practices and unnecessary costs. Underutilized resources can be reallocated across projects, reducing the need for additional investments, while overutilized resources can avoid burnout (and the other costly effects of overutilization we previously discussed).

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Hopefully by now it’s pretty clear why measuring resource utilization is so important in project management. But before you do start improving your resource utilization rate, you’ll need to know how to calculate resource utilization—accurately. Let’s start by scoping out what the ideal level of resource utilization is.

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What is the optimal level of resource utilization?

Don’t worry—it’s not 100%!

Non-billable hours are necessary to get other important high-value activities, as well as administrative tasks, done and give your staff the time off they need, all of which helps to achieve high quality client outcomes and underpin a sustainable business.

With this in mind, the optimal level of resource utilization for professional services firms is generally considered to be in the 70-80% range (i.e., 4 out of 5 days a week are spent on billable tasks). The rates that professional services firms charge their clients is also a key factor in determining the optimal resource utilization rate, as for example this could be lower if the ratio of revenue to cost is higher, and vice versa.

While a higher billable utilization rate typically indicates higher profits, it’s just not realistic to expect every resource to be maximized to its full capacity; balancing the expectations on the team in terms of capacity vs demand is key.

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How do you calculate resource utilization rate accurately?

Ready to start measuring resource utilization? Let’s break it down step by step:

Step 1: Identify your resources

First, simply identify the resources you want to measure.

Step 2: Determine your capacity

Next, you need to determine the maximum capacity/availability of each resource you’re measuring.  

Resource capacity is calculated as the total days that a resource could be available to work i.e. 365 days minus weekends and public holidays.  

Availability additionally factors in annual leave and an allowance for sick leave provision, and a common baseline for availability across the year is 220 days.

Whichever baseline you decide to use, this will need to be adjusted for part-time workers. For example, if a consultant only works 4 days per week, you’ll need to calculate their total capacity based on 4/5ths.

Step 3: Measure usage

Track the actual time spent on specific activities (billable, non-billable, productive) of your resources over a given time period. For example, calculate the number of billable days in the month or across the year.

Step 4: Calculate resource utilization

To calculate resource utilization rate, you’ll need to divide the actual usage by the total capacity or availability, and then simply multiply by 100 to get a percentage.

A typical resource utilization formula looks like this:

So, let’s imagine you’d like to measure the utilization rate of one of your consultants, James. James is assigned to work 8 hours a day for 5 days a week, which means he has a total capacity of 40 hours. Over the course of a week, James logs 30 billable hours.

If we apply the resource utilization formula here, the result looks like:

This result means James is billable 75% of his available time—good going, James!

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How do you improve resource utilization?

Perhaps you’ve used the resource utilization formula above and realized you may need to make a resource utilization plan to start improving your rates.

If you’re looking to master your resourcing strategy, here are some best practices for managing both overutilized and underutilized resources—all of which will help you improve your resource utilization rate.

Prioritize and delegate

If you want to lighten the load on your overutilized resources, it’s important to identify your most critical tasks and prioritize them accordingly. You can delegate some responsibilities to other team members to distribute the workload more evenly. The vast majority of your team members’ time should be spent on billable tasks, so make sure no one is drowning in administrative work.

Implement resource planning

Resourcing meetings are a common staple in professional services firms, and a powerful tool for keeping your people and projects on track. With a clear overview of resource capacity and commitments, you’ll be able to avoid overburdening specific resources.

Additionally, incorporating pipeline into your resourcing meetings can give you a forward-looking resourcing model which provides a holistic view of capacity and demand, allowing you to be fully effective with resource allocation.

Take advantage of external resources

Although contractors are more expensive than employees, they do have a priceless advantage: flexibility. You can use the flexibility they offer to manage peaks in demand, avoiding overutilizing resources and burning out your precious team members. In fact, external resources can provide a number of benefits to your resource strategy.

Conduct an internal skills audit

You don’t want to find yourself in the position of having demand for roles and skills that either don’t exist or aren’t available.

By conducting a regular audit of your internal staff’s skills and competencies, you’ll get clarity on what skills your employees either have or need, and will be able to fulfil any specific requests that come your way.

Of course, you don’t want to permanently hire an employee with a very particular niche—they’ll most likely end up underutilized and unhappy with the types of projects that keep them busy. That’s when you’d turn to external resources and use a contractor to help you out instead.

Increase timesheet adoption

The best way to get visibility into how your resources (i.e., employees) are allocating their time is through timesheets. Timesheet data helps you to identify bottlenecks and inefficiencies, and also identify trends which can be used to make data-driven decisions on how best to manage your resources.

Despite these benefits, timesheet adoption is often poor—but fortunately there’s ways for you to improve adoption (and, ultimately, ensure your resource utilization metrics are accurate).

Adopt resource management software

If you’re struggling to gain visibility over all your resource-related information, resource management software can centralize all the data you need in one unified platform. The features and capabilities of resource management software varies from platform to platform, but they can provide valuable, real-time insights into how efficiently and effectively your resources are being utilized.

Research has shown that adopting resource management software as part of a PSA (professional services automation system) can increase utilization by two percentage points vs. standalone systems, and seven percentage points vs. spreadsheets. Read the full research piece.

Conclusion

There’s really no method more effective for saving time and money for your firm than improving resource utilization.

An effective utilization rate dramatically improves your chances of delivering a project on, while an ineffective one can cause significant revenue losses and affect the wellbeing of your team.

If you follow the steps above to calculate and improve your resource utilization rate, you’ll be on the right track for delivering high-quality projects that keep you and your clients happy.

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