Billability vs Utilization: How to Measure & Improve on Them?

Billability, utilization and , billable utilization – what’s the difference and how does it all relate to profitability? And what does time tracking have to do with it?

Here are the simple, traditional definitions:

• Billability is the % of hours billable to clients.
• Utilization is the % of hours doing productive work.

Spoiler alert: fewer and fewer business bill by the hour. For other pricing models, billability and utilization are just as crucial but mean something else.

To understand billability vs utilization, you need to understand how these metrics are calculated and, ultimately, how they can be applied in your context.

Keep reading to get a better understanding of the math behind billability, utilization, and profitability.

The meaning of billability

Billability is the capacity of a person, team, or organization to perform billable work, i.e. services that can be charged to clients.

Historically, when we talk about billability, we talk about billable rate and billable hours. Hourly billing might not be the pricing model of all service businesses today but it was the default pricing model for a very long time.

In this context, billable rate is what you would charge per smallest chargeable increment of time, which can be anything from 6 minutes (think law firms) to 60 minutes (aka hourly rate).

Of course, the reality of many service businesses is that they don’t charge by the hour. They work on flat rates, retainers or value-based, which gives billability and utilization a new meaning.

The meaning and formula of utilization rate

Utilization or, more specifically, utilization rate is a measure of time spent earning revenue vs total hours purchased from a person or team.

In an environment where time spent on client work directly translates to revenue, utilization is a clear performance metric. The more hours you work, the more you can bill to clients.

But even then, it’s not always clear which tasks can be classified as revenue-generating, i.e. billable to clients or otherwise contributing to company revenue. To name a few of these gray areas.

• Meetings about multiple clients.
• Context switching between projects.
• Sales and marketing activities promoting your services

This is the tricky part, where depending on how you define utilization you can have very different utilization rates across similar businesses

Industry benchmarks aren’t a lot of help either. It’s up to every service business to define what counts as utilization and what doesn’t.

How to track utilization and why?

So why would a business that doesn’t charge by the hour care about utilization rate at all? Because regardless of the pricing model, time is your biggest resource. And utilization rate is a measure of how time is allocated.

Marcel Petitpas, agency profitability expert and a good friend of ours, explains it succinctly in our webinar on time tracking and profitability (available on demand).

“Whether you're selling websites or gutter cleaning or legal services, you purchase time from people in bulk and resell it at a profit.”

In this sense, defining and measuring utilization is about establishing a model of how time is being invested in a business. A few examples.

• Compare planned vs realistic hours on a project.
• Determine your most profitable clients and services.
• Make sense of retainers based on how much you actually work.
• Figure out what you should charge for your services.
• Avoid your team being overworked or underworked.

All of this is impossible without a clear understanding of utilization, i.e. where your team’s time is going.

How to calculate utilization in an employee-friendly way?

We’ve come to the part of actually measuring utilization given its shifting meaning and the challenges of defining it.

The bad news is that you still have to do the job of defining what revenue-generating work is for your business. Whether it’s strictly billable client work or a broader range of tasks – this is something you figure out on your own.

The good news is that the tedious job of tracking hours can be made easy and safe for everybody on the team, meaning no one can see each other’s screens or times in programs.

Employee-friendly time tracking needs to be 2 things.

1. Automated, so you don’t have to think about it.
2. Private, so your team is not creeped out.

Both are possible with an automated time tracker like Memtime. It runs in the background and records your time in programs, files, tabs, emails, etc., while keeping all data offline on your device only.

When remembering your day is a matter of taking one look at your captured timeline, logging hours is easier than ever. Then you can calculate utilization based on accurate and timely data from everybody on the team.

How to improve utilization

Now that you have your utilization rate, you can look at it over time and take steps to improve it if it makes sense for your business and your profitability.

For example, you may decide that you’d rather raise your prices than chase a higher utilization rate. This is a valid strategy that can be very effective if your decision is based on accurate time tracking data.

Let’s now look at the ways to improve utilization in case this is your strategy to grow profitability.

1. Focus on fewer clients

One simple way to grow your utilization rate – that is, to grow the sheer % and make your numbers look good – is to decrease the number of projects your team is working on.

Teams that spread across fewer clients at a time tend to have higher utilization rates without burnout. This is logical seeing how context switching and task switching all eat up time.

If a person can spend a week focusing on one client, their billable time can be close to 40 hours out of the 40 available that week. Here you have a “perfect” albeit unrealistic utilization rate of 100%.

2. Improve forecasting

In an environment where project and client load is constantly shifting, it’s easy to find yourself under- or overstaffed, depending on how many services you’ve sold in any given month or quarter.

Obviously, this is not as simple as laying some people off while overworking the rest. By looking at your utilization rate in progress, you can start seeing patterns and get better at forecasting.

Ultimately, it all boils down to how reliable your data is, i.e. how truthful and consistent your team is at logging time on projects. If you can achieve accuracy and consistency, you improve forecasting and grow utilization without causing burnout.

3. Balance the load

Utilization can be calculated on any scale: individual, team, or company-wide. This is the beauty of it: by figuring out your optimal median utilization rate you can balance the utilization of specific teams or individuals to maintain equilibrium.

Knowing the utilization across teams, you can spot gaps and redistribute the project load depending on who’s the busiest at any given time.

While this won’t help you improve company-wide utilization right away, it will help you ensure equal and predictable workload across teams.

Once you’ve balanced the load across the company, you can make smarter hiring, upsell, and cross-sell decisions as your business is becoming more predictable.

Wrapping up

The meaning of billability, utilization, and billable utilization may change with time. However, their value in growing profitability and making revenue-driven decisions remains high.

One thing that’s clear about utilization is that its separation from the hourly billing model and subsequent transformation into a business health metric makes it relevant to all kinds of service companies.

Ultimately, you decide what to make of billability and utilization. The key here is to look at them in the larger context of profitability and always benchmark against revenue.