Generally speaking, employee utilization is a measure of time spent working. It is typically expressed as time spent working divided by the total amount of time available to work. Have a look at the general employee utilization formula below:
Utilization = time spent working / total amount of time available to work
Let’s dig in a bit more.
There are two main ways to think about utilization. They differ based on what is decided to be the correct numerator and denominator in the utilization calculation. The first we define as “resource utilization”, which is the % of time available to work that is spent on useful tasks. The second we define as “billable utilization”, which is the % of time available to work that is billable.
Defined as the percent of time spent working on useful tasks, resource utilization involves both billable and non-billable time at work. Let’s look at a formula for clarity.
Resource Utilization = time spent on useful tasks / total amount of time available to work
The numerator here, time spent on useful tasks, includes billable work, but it may also include time spent on internal projects like new business, sales, or marketing efforts. It wouldn’t, for example, include time spent on vacation or twiddling one’s thumbs waiting for the next project to land.
Defined as the percent of time spent working on billable tasks, billable utilization is likely the most common method used when calculating utilization.
Billable Utilization = time spent on billable tasks / total amount of time available to work
Services organizations want to increase this number as much as they can, while still maintaining a reasonable % such that employees aren’t drowning in work. Thus, companies often set target billable utilization rates that satisfy both the need to bill time and the need to keep team members happy, healthy, and not burned out.
Changing the Numerator and Denominator
A few comments on the two utilization calculations above. First, the nominator is subject to change. For example, what are counted as “useful” activities may vary from company to company, and thus would change the nominator for the resource utilization calculation.
Second and more likely, however, the denominator is subject to change. It is often debated what the ideal denominator is in the employee utilization calculation. By way of example, the following may very well be valid denominators:
40 hr week x 52 weeks = 2,080 hrs
50 hr week x 52 weeks = 2,080 hrs
40 hr week x 50 weeks = 2,000 hrs *subtract 2 weeks for yearly vacation
40 hr week x (50 weeks less company holidays) = <2,000 hrs depending on number of company holidays
There is simply no “correct” denominator, you must choose what works for your organization, your culture, your resourcing, and your project accounting procedures.
As a rule of thumb, if you’re calculating utilization on a weekly or monthly basis, it is unlikely that (barring a few weeks out of the year) you would use anything less than 40 hours per week as a baseline.
Great, so why is employee utilization important?
Glad you asked. Employee utilization rate is an important calculation because it gives services organizations insight into their most valuable resource - their employees. With this insight, companies can then go on to improve many things, including employee happiness and profitability.
Here are a few ways in which utilization figures can be used to help a company :
Utilization figures are the backbone of any good resourcing program. In fact, in order to resource effectively, you must know someone’s availability to be staffed on a project, which is the inverse of their projected or current utilization. That is, if someone is 60% utilized, then this person has the ability to take on work that will fill the remainder of their target utilization.
For example, if the expected hours worked is 40 hours per week, then 60% utilization would indicate that this person is currently working 24 hours this week. If a new project requires 8 hours per week, then this person could be staffed on this project and hit a utilization of 80% (32 hrs), which is along the lines of a more healthy utilization figure. Of course, every organization will have its own target utilization figure.
This one is pretty straightforward. If everyone on your team is at maximum utilization, then this is a strong indicator that you should hire. Not only will you be able to take the burden off of some employees who are most likely overworked, you will also be able to take on new work with this new employee.
Imagine you’re working at 100% or 110% utilization for more than 2 weeks in a row. If this continues for a sustained period of time, then you may very well risk becoming burned out. Having an understanding of utilization in real-time allows managers to address these situations - in this situation taking some of the load off this employee so they can go back to living a more normal life. On the contrary, if someone’s utilization is constantly low, then this is a strong signal that this person is likely extremely bored at work. Although many may think otherwise, research has shown that the happiest employees are those with meaningful tasks to perform at work. The happiest employees are not those without anything to do all day. Accurate utilization figures reveal who’s busy and who’s bored - allowing management to make a positive change in that person’s life.
Understanding Project Status
Here’s a less obvious idea. Some projects are absolute time sucks for those team members who are staffed on them. The team members are probably falling behind on their other projects because one project in particular is taking the majority of their time and effort. Having an understanding of project based utilization allows management to see which projects are causing certain employees to be over burdened with work. This could indicate a number of things - a project with scope creep, a demanding client, an inefficient team, project spin, and more. Although the cause may not be immediately clear, having an understanding of project based utilization can lead management to start asking the right questions so they may change course as quickly as possible.
In summary, we hope this post helped clarify what utilization is, and has provided a number of ways for you to understand how this sort of information can be valuable to a service based organization. In order to get a real-time, accurate employee utilization report, it’s important to have real-time and accurate timesheets. We at Allocate are biased, but we think we can help with that. Drop us a line sometime at firstname.lastname@example.org.