Each year, the team at Promys speaks with thousands of professional service delivery folks who are all interested in the age-old question: “What strategies can we employ to raise billable utilization?”
It’s one of the most important questions facing a growing professional services organization because the heavy fixed costs involved in building out a professional services offering are incurred in order to provide the opportunity for much higher profit margins (vs. lower profit margins for products). However, those higher margins are only realized if billable utilization remains consistently high.
Although there are some universal truths about labor utilization (e.g. If don’t track it, you can’t manage it.), there are a variety of ways of raising billable utilization and only some will be a good fit for your business.
1) Plugging billable utilization leaks at the customer level
One of the more interesting and potentially controversial ways of raising utilization rates is to fire some of your lower-performing service customers. There’s a very interesting statistic from Bruce Stuart at Channel Corp., a global leader in channel consulting and education – “25% of services engagements lose 25% of profits”.
Most organizations look internally for ways to raise utilization. The truth is that we all have customers that always want things for free, grind us on price and always change the scope at the last minute but don’t want to be billed for change orders. The trick here is to measure it. You’ll need to be able to break out your billable and actual hours by customer. It would be even better if you could break it down by labor type and which resource provided the labor.
This way, you can isolate which customers always consume more actual hours than estimated and ideally either cycle those implementation lessons learned back into the sales/quoting process or determine if this customer is never going to provide good services margins and cut them loose.
If you can get the analytics, you may also find that this is not a blanket problem across the customer. It may only relate to certain services you provide or certain field resources that the customer is successfully targeting for unbillable work.
If you can easily monitor your labor utilization at this level of detail, then you can find and plug those billable labor utilization leaks at the customer level.
2) Sealing billable utilization leaks by service type
Companies often focus on high or low utilization individual performers. Although there certainly is a time and place to eliminate consistently low-performing resources from your services organization, the 5% “bump” in billable utilization you’re striving for may be available with less drastic measures than replacing resources.
According to Channel Corp…
“It takes a newly-hired services resource 6-9 months to become fully profitable… and if you turn services staff over more frequently than every 18 months, the services organization may struggle to produce consistent profitability.”
Most service organizations have some resources that are cross-trained to deliver multiple service types. Some may have multiple certifications or they may have just picked up new skills over time.
But the truth is, aside from the formal certifications, there’s typically very little monitoring and measurement of the proficiency for each resource with each skill set or service type. As a result, there’s very little visibility into the service types where resources are only moderately proficient. It is not just a matter of motivation – I love the saying that if you take an idiot and motivate them, all you end up with is a motivated idiot. – but the real drag on billable utilization may be a lack of service-type proficiency. Therefore, the service types that resources struggle with take them longer to complete and eat into your profit margin.
Again it all comes down to visibility. Ideally, you can run analytics that shows you actual hours for all of the different service types performed, by resource, over a specific period of time, which you can then compare to the estimated hours. This would allow you to measure the “ramp-up” progress of new resources and identify problem areas sooner so that you can allocate more targeted training resources. This would also allow you to identify areas where experienced resources are operating outside their comfort zone so you can provide additional training, or just stop allocating those types of work assignments to that particular resource.
This is especially important for fixed-fee projects. But the truth is, even for time and materials projects, having the actuals come in close to the estimates, is equally important from a consistent customer satisfaction perspective.
3) Can I actually raise my billable utilization rate by subcontracting more?
The more accurate question here is probably: “What is the best way to raise my services profitability – doing less of the work ourselves and subcontracting more?”
If you subcontract more, your top-line labor margins will be lower, but so will your fixed costs.
When you actually do that math, factoring in benefits, office space, laptop, phone system and other infrastructure) and then layer on top of “average billable utilization” percentages, a margin comparison between in-house resources and subcontracting becomes a lot more competitive than you might initially think.
Let’s look at an example of a cabling resource. We bill the customer at $90 an hour for cabling work whether we use internal resources or subcontract. An internal resources loaded rate is $45 an hour and the subcontractor’s rate is $65 an hour. Seems like a no brainer, right? That’s a 50% margin if we do the work ourselves but only a 28% margin if we subcontract.
However, if you take into account that your internal resource is only operating at a 70% billable utilization rate, then you’re paying that resource for 30% of their time that you’re not receiving revenue for. If you take a corresponding 30% off your labor margin, that reduces your internal cabling services margin by 18%. Now, the effective margin differential is 32% for in-house resources vs. 28% for subcontract resources.
In addition, when you subcontract, you’re almost always receiving revenue for the hours you’re paying for, so your margins are consistent. With in-house resources, your margins will fluctuate in direct proportion to the billable utilization rate for your in-house resources.
So, when do you continue to invest the heavy fixed costs involved in building out a professional services team and when is it better to subcontract? The answer is in your analytics because you need to know the detailed actual profitability of each resource, the types of services they’re delivering, and the comparison between the estimated hours and the actual for each of the service types they performed.
Use analytics to show you how to increase billable utilization
At the end of the day, there is no magic bullet for increasing billable utilization. What it really comes down to is measuring it, in detail, and accurately – based on a variety of different reporting criteria, so that you can effectively manage it.