Uncomplicating the Complicated: What Utilization (Really) Is and How to Calculate It
If you were to poll every leader in your organization about the definition of utilization and how it’s calculated – actually, if you were to poll every leader across the digital services industry – everyone might offer up a different definition and a different method for calculating that ever-important, sometimes haunting metric. This is exactly why utilization is so difficult to define, calculate, and track—why it can spin leaders and resourcing managers in circles. There are too many different ways to approach it, but frankly (and yes, according to us 😉), there’s only one right way.
Not to brag, but the benefits of adopting our approach (affirmed by the industry benchmark from SPI Research) to utilization are noteworthy. You’ll shift from a complicated, confusing, and frustrating approach for measuring and tracking this metric to one that’s simple, streamlined, and straightforward. You’ll be able to effectively communicate to the rest of the organization about what utilization means, why it matters, and how they can better support the business in reaching its targets (looking at you, timesheets). And the best part: you’ll be able to more easily evolve your business from a heroic or operational stage to one that’s strategic—where your teams are working smart and collaboratively, supported by solid processes and systems, and you have the capacity and ability to strategically plan for the next big thing. Sounds nice, doesn’t it?
How to calculate utilization and capacity (a straightforward take)
Let’s first get on the same page regarding the true definition of utilization and how it differs from capacity. There’s a lot of noise in the industry about what means what, and there are way too many variations of both metrics that muddle the whole process. This leads to utilization and capacity either being used incorrectly or interchangeably, and it causes confusion all the way from the top to the bottom of the organization. We’re here to change that.
To keep it as straightforward as possible, we abide by the following definitions and calculations at Parallax (and we highly recommend you do the same):
The 40-hour work week example:
- Total capacity (100%) = 40 hours. No surprises here. Just the total hours available to do ANYTHING each week.
- Billable capacity (80%) = 32 hours. Billable capacity is the total available hours for BILLABLE work in a given week. This usually assumes 20% or 8 hours will be spent on activities we can’t charge customers for – think all-hands meetings, ice cream socials, and the like.
- Target billable utilization: This is where things often get confusing. Where capacity is something that may vary from week to week depending on an individual’s PTO, sick time, holidays, etc. – target billable utilization should be thought of as the average goal over time.
The important thing to note here is that if your goal is to hit an average of 80% billable utilization in a given period, your plans should aim above your target. Why? Because plans change and in most cases, we end up billing less time than we anticipated.
In order to hit that target billable utilization we recommend planning with a billable capacity as high as 90% or 100% to account for the inevitable variances that happen from week to week.
Now, this doesn’t mean your goal should be to burn out your teams. To avoid this we recommend reviewing resource plans each week and adjusting the go-forward plan accordingly. If you are consistently exceeding your target billable utilization, then you can adjust resource plans down to be more in line with your goals.
In short, using both billable capacity and target billable utilization to plan sets your team up to achieve actual utilization for your company.
Utilization and capacity planning can feel like an impossible equation to solve—we get that. But while it’s complex in nature, it can be simplified by focusing on the metrics that matter most and by always aiming higher so you have a better chance of hitting your targets.
We love talking math, so if you have any questions (or just feel like venting 🙃), schedule time with us.