Utilization Rate in Consulting Firms
In professional services firms that bill clients by the hour, such as management consulting, public accounting, or law firms, the utilization rate is a common metric for evaluating the economic contribution made by members of staff. It typically is computed as the individual's actual billable hours divided by the number of standard work hours in the period in question, usually 40 hours per week.
Significance for Careers
Utilization rates, whether firms acknowledge it or not, frequently factor prominently into decisions about compensation and promotion, though typically not in a fully explicit or completely formulaic manner. The cultures of many such firms often are marked by utilization as a common topic of discussion among members of staff, and a source of bragging rights for those reporting the highest levels.
More Detail on Calculation
The numerator of the utilization rate is the actual number of hours of work by the professional in question that were billed to clients in a given period of time, such as a week, a month, a calendar year, or a fiscal year. The denominator normally is based on the customary standard work schedule of 8 hours per day, 5 days per week (normally Monday through Friday).
Thus, the denominator will be 40 (5 days times 8 hours per day) for a weekly computation. For a monthly computation, it probably will reflect the actual number of Monday through Friday weekdays in that month, which can be as high as 23. For a year, the denominator probably will be rounded off to 2,000 (reflecting 50 weeks at 40 hours per week).
Accordingly, a staff member who bills 60 hours to clients in a given week will have a utilization rate of 150% (60 hours divided by 40 hours) for that week. Likewise, someone whose billable hours were 2,500 for a calendar or fiscal year would be deemed to have a 125% utilization rate (2,500 hours divided by 2,000 hours) for that year. A utilization rate of 150% or more often is taken as a hallmark of a top performer.
Flaws in the Utilization Metric
In addition to the hours billed out to clients, staff members in management consulting, public accounting and other professional services firms inevitably spend significant amounts of time on internal administrative tasks that do not produce revenue, at least not directly. For example, the time spent on prospecting clients or developing pitches for possible engagements are not reflected in the utilization statistics. As a result, the undue weight given to utilization rates in some firms can unfairly devalue the work effort contributed by various members of staff.
Unfairness: Staff members at the lowest levels of a consulting, accounting, or other professional services firm typically have minimal discretion in arranging and scheduling their work assignments. Thus, someone who is tapped by senior staff for a succession of non-billable administrative tasks during the course of an evaluation period is bound to have a utilization rate that deceptively understates his or her work effort and contribution to the firm.
In some firms, decisions about pay and promotion (especially in a firm with an aggressive up or out policy) can be heavily weighted on utilization statistics. Moreover, the internal management reporting systems within the firm may not contain sufficient detail on the precise nature and value of the non-billable hours and assignments that have occupied the time of staff members.
In such a situation, those staff members with high proportions of non-billable hours may be at a disadvantage relative to their peers with higher utilization rates during performance reviews. This is especially so if these reviews and decisions about compensation and promotion are conducted largely by partners who may not have had much personal contact with the staff members in question.
Pressures on Staff
Professional services firms, such as (but not limited to) management consulting and accounting firms, typically will have formal, written policies (and will give occasional stern reminders to staff, either verbally or in memo form) about the absolute necessity for honesty and integrity in filling out time sheets and, thus, in assigning billable hours to engagements and clients.
Nonetheless, if partners or other senior managers signal that utilization is a key factor in pay and promotion (or if a tacit understanding to this effect is part of the organizational culture), staff members will feel a not-so-subtle pressure to pad their billable hours.