In the bustling world of agencies and software development companies, every minute counts.
As an industry insider, I've seen firsthand how the concept of 'billability' can make or break operations.
But what is billability, and why is it so crucial? Simply put, it's a measure of chargeability, a way to differentiate between billable and non-billable tasks, and a tool to optimize resource allocation. It's a key metric that, when understood and utilized correctly, can significantly enhance efficiency and profitability.
However, it's not without its challenges and misconceptions.
This article aims to demystify billability, from its definition to its calculation, its importance, and even how to improve it. We'll also tackle common misconceptions and provide real-world case studies.
So, whether you're a seasoned professional or new to the industry, this comprehensive guide on billability is a must-read.
Understanding Billability
Defining Billability
In basic terms, billability, also known as billable utilization rate, is the proportion of your working hours that can be billed to clients. It's a way to measure the value of the work that directly affects a business's bottom line.
This metric provides an overview of how efficiently your agency is using its time and resources. It's a key indicator of your agency's operational efficiency and profitability.
Billability vs Productivity
Now, let's delve a bit deeper into the concept of billable hours and non-billable tasks. Billable hours are the hours spent working on client projects that you can directly charge to clients.
Aside from internal non-billable time such as team meetings, staff development/training, or networking and attending conferences, some hours worked for clients are also non-billable. It could be due to a project going over budget or the need for some free rework. In these cases, some non-billable hours may be worked on the project.
For example, let's say an employee works a total of 40 hours on a project, but only 20 of those hours were billable because the project exceeded its budget. In this scenario, they would have a billable utilization figure of only 50%, even though they worked a full 40 hours.
Billability aka billable utilization is a measure of chargeability not productivity.
This highlights the importance of looking at other utilization metrics beyond just billable utilization. While billable utilization is a significant metric, it doesn't give a complete picture of an employee or company's overall utilization.
Other metrics like client utilization and total utilization (which include both billable and non-billable client hours) can provide a more comprehensive assessment of productivity and resource allocation.
How to Calculate Billability
The most common way to calculate billability is dividing the number of billable hours by the total number of hours worked.
This gives you a percentage which represents the proportion of worked hours that are billable.
For instance, if an employee works 32 billable hours out of a 40-hour work week, their billable utilization for that week would be 80% [32/40 x 100]. This means that 80% of their work directly contributes to the revenue of the business.
The Importance of Measuring Billability
The rate at which employees in your agency are utilized directly impacts the amount of revenue generated and serves as a measure of how effectively your team's time is being used.
Generating Revenue
Increasing billability rates is directly linked to revenue generation for the agency. The more billable hours logged by employees, the greater the revenue generated by the firm, leading to increased profitability.
Ensuring Appropriate Task Allocation
Keeping in mind that billable utilization rates do not reflect the level of effort someone is putting into their work is important. Having a higher billable utilization rate does not necessarily mean better performance.
Senior staff members in an agency often have lower utilization rates due to managerial duties, resulting in most of their work being focused on internal tasks rather than client-facing responsibilities. By monitoring the billability rates of various employees or teams and comparing them to set targets, agencies can assess whether their time is being utilized as intended.
If you track utilization rates based on the seniority level of your resources, you can address any issues with talent development, such as junior team members not gaining enough experience and senior employees being overwhelmed with low-value work and lacking time for more valuable tasks like development, mentoring, and management.
Industry Benchmarks for Utilization Rate
Understanding Industry Standards
Each agency has its own percentage for the billable utilization, which is often a reflection of its operational efficiency and culture. The billable utilization rates also differ depending on the role level.
While some agencies may aim for an 85 to 90 percent billable utilization rate, the average utilization rate is significantly lower at around 65 percent, according to the recent [2023] BenchPress’ ‘Benchmark for Agencies’ report.
The report also breaks down the average billable utilization rates by role, with Junior roles at 75%, Mid-level roles at 73%, Senior roles at 63%, and Director roles at 37%.
Consequences of Falling Below or Exceeding Standards
Not meeting the established benchmarks for billability can have serious implications. It indicates that the agency is spending too much time on non-revenue generating tasks, leading to reduced profitability. On the other hand, going above the standards is not necessarily favorable either. A high rate could imply that your organization is neglecting important internal work and may require additional resources.
Therefore, it is crucial for agencies to effectively manage their billability rate and aim to align with industry benchmarks in order to maintain efficient and sustainable operations.
Optimizing Billability
Role of Time Management
Using advanced time-tracking software that includes billable utilization calculation features, such as Teami, is one of the most effective methods for optimizing billability rates. The data collected from this software can then be utilized to identify areas of inefficiency and create targeted strategies for improvement.
According to the recent [2023] BenchPress’ ‘Benchmark for Agencies’ report, using software boosts utilization rates. Agencies that use spreadsheets to track time and manage projects and resources had an average utilization rate for non-director roles of 66%. Those that use software had an average utilization rate for non-director roles of 75%. That difference translates directly into profitability.
Keep in mind that the objective is not solely to increase the number of billable hours, but to also maintain a high standard of work, provide opportunities for learning and growth, and allocate billable and non-billable time appropriately based on job level.
Case Studies
Successful Billability Improvement Strategies
Let's look at a real-world example of a company that successfully improved its billability. SMT, a tech company that supplies software and operational intelligence services, faced challenges with insufficient project monitoring and low billability rates. They also struggled with project planning and resource visibility. To overcome these hurdles, they turned to VOGSY, a solution that provided real-time billability charts, detailed project tracking, and resource visibility.
With VOGSY, SMT was able to compare consultants' planned and actual billability to targets in real-time, enabling them to increase billable hours. They also gained a detailed understanding of how planning and execution affected profit margins, giving them the control they needed to prevent projects from going over budgeted hours. Moreover, VOGSY's resource heat map and project planning view provided SMT with continuous resource availability information and a timeline of all projects, deliverables, and resource allocations. This allowed them to forecast resource needs, increase availability, and move projects from the "waiting list" to live projects sooner.
The result? SMT increased consultants' billable hours, prioritized project profitability, and won more deals. They also became more proactive in bringing in projects and closing opportunities earlier. This case study demonstrates how the right strategies and tools can significantly improve billability in a company.
Impact on Productivity and Profitability
The impact of these improvements on SMT's productivity and profitability was significant. By moving projects from the "waiting list" to live projects sooner and being proactive in bringing in projects, SMT was able to increase billability and turn inactive projects into revenue. This not only improved their productivity but also their bottom line.
Moreover, by providing consultants with real-time project budgets and margins, SMT was able to foster a sense of ownership among its consultants. This resulted in a coordinated team effort towards profitability, with consultants coming up with innovative ways to meet financial targets. This case study highlights the profound impact that improving billability can have on a company's productivity and profitability.
Conclusion
In the dynamic world of agencies, billability is a critical measure of both efficiency and profitability. We've thoroughly examined the concept and its role as a performance indicator, delving into its impact on generating revenue and running operations smoothly. Real-world examples have illustrated the significance of billability, while industry benchmarks have provided helpful guidelines. Straying from these standards can have negative consequences, highlighting their importance. Additionally, we've shared strategies for optimizing your agency's billability, stressing the value of utilizing tools like Teami. As we wrap up, it's important to remember that mastering your agency's billability rate is an ongoing process of improvement, and each step towards optimization brings you closer to success.
