I was talking to a member of the consulting community recently about how best to evaluate a consultant practice. This person provides consulting to consultants, and he indicated that he often tells his customers to stop measuring utilization. It did not become clear in our conversation what he thinks is wrong about the utilization metrics, but I've been giving it a lot of thought since then. So, I wanted to investigate the pros and cons of measuring utilization.
On the cons side, utilization does not reflect the value that has been delivered. It rewards the amount of work done and not the results of the work. This reward system is in conflict with my post "Customers aren't paying you to work hard, they are paying you to add value and drive results" from December 2013.
I am a firm believer that one's compensation plan drives his behavior. Paying consultants a bonus based on utilization drives them to find ways to do as much billable work as possible. While this may drive revenue and ensure that consultants raise their hands for more work when they are rolling off a project, some of the work done to achieve a utilization target may or may not drive value and result in a positive change for the customer. It may also encourage individuals to pad their time sheet by rounding up or adding a few minutes here or an hour there, just to make sure that "this week's utilization target" is met and one stays off the manager's warning list.
On the pros side, the reality is that consultants and consulting teams have a finite amount of time to dedicate to billable work. In addition to delivering billable work, consultants need to conduct business development activities, skills development, thought leadership, and a list of administrative tasks that all must get done for the business to work. Setting utilization and hourly rate targets allow you to assess your capacity to drive revenue:
=((10 * 2080) * 75%) * $250 = $3,900,000
So if you managed a team of 10 billable consultants, each expected to deliver 75% utilization at $250/hour, you could manage a $3,900,000 practice. That equals 15,600 hours of consulting in a year at that hourly rate. If your management set a goal for $5,000,000, what can you do increase revenue.
There are really two ways I can think of to increase your revenue:
As you track utilization you can learn when you are over burdening your team and likely to have to delay start times on projects because of the lack of availability of your team. Most consulting practices maintain some form of acceptable backlog. (I have found that 4-6 weeks is a reasonable time for me as a manager to have visibility into what my team will be doing and revenue we will generate and still be reasonable for most clients to wait before we start their project. Longer than 6 weeks, though, I risk loosing the contract or frustrating an important customer too much.) As I monitor utilization and my forecast for the coming months, I can advocate for short-term or permanent increased (or decreases) to the size of my team to take on additional work and meet market demands.
I also use utilization to evaluate where we are spending our time. I measure utilization at the practice level, individual level, and resource-type level. This gives me another view into the state of my practice and potential changes that may be needed: Are we able to drive revenue and customer value with less experienced and expensive consultants, or do we need to depend more heavily on our more senior and expensive resources?
At the individual level, I look for individuals who consistently miss their utilization target. I don't worry about weekly anomalies, but if I see a consultant who is not meeting the target regularly, I work to determine why:
Once I know why the individual's utilization is low, I can address it proactively.
I had a chance to attend a lunch and learn session with David A Fields last month. David talked a lot about pricing based on value rather than time. He encouraged the consultants in the room to dig in with their clients to understand their pain and determine the measurable value of addressing the pain, then determine the value of the work you, as a consultant, will do to move the needle in the right direction. Once you understand that value equation, David says, you can price based on that, often times earning significantly hire rates than what you consider "list" price or "target bill rate."
While I agree completely with David's philosophy, the reality still remains that a consultant only has so much time and needs to understand when he (or his team) is taking on too much and won't be able to deliver what is promised. It is also important to measure the time spent on the project after it is completed to ensure that the amount of work required to deliver the value was in line with the practice economics. If, for instance, you determined that the value of the work that you will do is $20,000 but it takes you 200 hours to deliver that value, would you earn enough money to sustain your business? 200 hours delivered against a $20,000 invoice is $100/hour. Is that acceptable for your business? Should you take work like that on? Only you can decide.
Ignoring utilization completely is dangerous and will leave you exposed. However, relying on it too heavily can drive the wrong behavior from your team. Develop compensation plans with a combination of metrics and goals that drive the right behavior - with a focus on value creation, and use utilization as one data point to indicate the health of your practice.
I'd love to hear from you on how you use utilization in your practice.
On the cons side, utilization does not reflect the value that has been delivered. It rewards the amount of work done and not the results of the work. This reward system is in conflict with my post "Customers aren't paying you to work hard, they are paying you to add value and drive results" from December 2013.
I am a firm believer that one's compensation plan drives his behavior. Paying consultants a bonus based on utilization drives them to find ways to do as much billable work as possible. While this may drive revenue and ensure that consultants raise their hands for more work when they are rolling off a project, some of the work done to achieve a utilization target may or may not drive value and result in a positive change for the customer. It may also encourage individuals to pad their time sheet by rounding up or adding a few minutes here or an hour there, just to make sure that "this week's utilization target" is met and one stays off the manager's warning list.
On the pros side, the reality is that consultants and consulting teams have a finite amount of time to dedicate to billable work. In addition to delivering billable work, consultants need to conduct business development activities, skills development, thought leadership, and a list of administrative tasks that all must get done for the business to work. Setting utilization and hourly rate targets allow you to assess your capacity to drive revenue:
- Billable FTEs: 10
- Working Hours per Billable FTE per Year: 2080
- Target Utilization: 75%
- Target Bill Rate: $250
=((10 * 2080) * 75%) * $250 = $3,900,000
So if you managed a team of 10 billable consultants, each expected to deliver 75% utilization at $250/hour, you could manage a $3,900,000 practice. That equals 15,600 hours of consulting in a year at that hourly rate. If your management set a goal for $5,000,000, what can you do increase revenue.
There are really two ways I can think of to increase your revenue:
- Add more consultants (either as full-time employees or as contractors)
- Increase your rates.
As you track utilization you can learn when you are over burdening your team and likely to have to delay start times on projects because of the lack of availability of your team. Most consulting practices maintain some form of acceptable backlog. (I have found that 4-6 weeks is a reasonable time for me as a manager to have visibility into what my team will be doing and revenue we will generate and still be reasonable for most clients to wait before we start their project. Longer than 6 weeks, though, I risk loosing the contract or frustrating an important customer too much.) As I monitor utilization and my forecast for the coming months, I can advocate for short-term or permanent increased (or decreases) to the size of my team to take on additional work and meet market demands.
I also use utilization to evaluate where we are spending our time. I measure utilization at the practice level, individual level, and resource-type level. This gives me another view into the state of my practice and potential changes that may be needed: Are we able to drive revenue and customer value with less experienced and expensive consultants, or do we need to depend more heavily on our more senior and expensive resources?
At the individual level, I look for individuals who consistently miss their utilization target. I don't worry about weekly anomalies, but if I see a consultant who is not meeting the target regularly, I work to determine why:
- Is the consultant lacking the skills required to do the work we are selling? Can we provide training to this person?
- Is there a behavior or cultural issue that makes it difficult to put this consultant on projects? (I have worked in organizations where the project managers or technical leads can proactively request specific resource to work on projects and even to NOT work on projects.)
Once I know why the individual's utilization is low, I can address it proactively.
I had a chance to attend a lunch and learn session with David A Fields last month. David talked a lot about pricing based on value rather than time. He encouraged the consultants in the room to dig in with their clients to understand their pain and determine the measurable value of addressing the pain, then determine the value of the work you, as a consultant, will do to move the needle in the right direction. Once you understand that value equation, David says, you can price based on that, often times earning significantly hire rates than what you consider "list" price or "target bill rate."
While I agree completely with David's philosophy, the reality still remains that a consultant only has so much time and needs to understand when he (or his team) is taking on too much and won't be able to deliver what is promised. It is also important to measure the time spent on the project after it is completed to ensure that the amount of work required to deliver the value was in line with the practice economics. If, for instance, you determined that the value of the work that you will do is $20,000 but it takes you 200 hours to deliver that value, would you earn enough money to sustain your business? 200 hours delivered against a $20,000 invoice is $100/hour. Is that acceptable for your business? Should you take work like that on? Only you can decide.
Ignoring utilization completely is dangerous and will leave you exposed. However, relying on it too heavily can drive the wrong behavior from your team. Develop compensation plans with a combination of metrics and goals that drive the right behavior - with a focus on value creation, and use utilization as one data point to indicate the health of your practice.
I'd love to hear from you on how you use utilization in your practice.
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