Utilization rates vs Realization rates

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Every Professional Services Organization should keep a close eye on its utilization metric. It is a good way to understand how productive is an individual or a team.

Here is how you calculate utilization rates:

Add up all the billable hours in a period divided by the total workable hours of this period. For example, if an employee has recorded 30 billable hours over a week, and say the workable hours in a week is 40 hours in your firm, then the utilization rate is 30 / 40 = 75%

Now, this method is not always accurate because:

  • An employee can work more than 40 hours per week
  • It doesn’t provide any information on how the non-billable time was spent

So here comes the realization rate:

Add up all the billable hours in a period and divide by the total number of hours recorded by the employee (billable + non-billable).

The realization rate provides the right billable performance of this employee, whatever number of hours he has spent over the period. And if you are using the right software to track time, you will be able to better understand how your employees are using their time:

There are many reasons to record non-billable hours in a Professional Services Organization: the employee can be working on a commercial proposal or working on an internal project. In both cases, it is important to have metrics about his non-billable time, because it would be a mistake to see that his realization rate is low and jump to conclusions that his time is not optimized. In many cases, commercial activities and internal projects have high returns.

Make sure that you are using a software that helps you track time accurately, and follow-up your team’s productive performance.

Recording precisely and looking at the right reporting is the first step. The next step is to optimize your resources, and this will be the topic of another post.