A recent discussion has raised the issue of how to drive profitability from your billable resources. After all, these are among your most expensive people and they can make a huge difference to the bottom line of your company. I will share 2 measurements that have really helped our business, Bralin Technology Solutions, to become among the best in class for service profitability.
Measure utilization by billable person. The industry best practice is 75% utilization. Many would look at this as an unattainably high number for a typical field engineer. In fact, many companies are trying to break the 50% utilization mark. But think of that another way - if you billed 8 hours per day for 9 months, you could take the other 3 off. So, 75% utilization still leave a lot of time to cover off personal time, training time, admin and meetings etc. At Bralin, we discuss that in hours, and bonus all our people if they make more than 30 billable hours in a week. Guess what, once we started incenting on it, we consistently are at about 75-76% utilized.
There are 2 considerations around encouraging higher utilization:
Let’s walk through this in more detail with an example of a field engineer. What do you include when you bill for a field engineer - just onsite time? We can learn a lot from more mature industries that bill for their time, such as legal or accounting offices. They also bonus their people on billable time, and they typically expect a lot more than 75%. However, they bill for all the time spent on a client matter.
For example, if someone was tied up from 9 am to 11 am on a client matter, they would bill 2 hours even if some of that time was spent to do research, or to travel onsite, or whatever. They simply look at it this way - "my staff member was unavailable to work for someone else because they were working on your matter, thus you get billed for the full amount of time that was spent". Even my plumber bills that way. Yet, most of us in IT would say "they were only onsite for 1.5 hours, so I'll only bill for that time", and the other half hour is gone forever. Yet, your engineer was unavailable to work on anything else, so why aren't we billing the client for that time?
If we think a field engineer cannot bill more than 50% or 60% of their time - probably the best place to start is to reconsider our view of what is considered billable. Then, we can start to drive our utilization rates up.
There is one other consideration that comes from industry best practices - a billable resource (inside or outside) should bill at least 2.5 times their earnings for the year (in the US it's a multiple of W2, in Canada it's a multiple of T4, not sure for other areas). We set the goal at 3x, and are happy if it stays above 2.5x. For example, if you paid an engineer $50k per year, his goal is to bring in$150k of revenue.
Some examples to tie it all together…
A senior engineer that earns $100k per year - it will be really hard for them to bring 3x their wages, or $300k in annual billings, but can they even try to get to $250k to be at 2.5x wages? To do the math, 75% utilization is 1560 billable hours in the year. Even that might be high, as there are public holidays, and personal days, so let’s use 1500 hours. If you have a bill rate of $125 per hour for 1500 hours, this employee contributes $187,500 for the year, far less than the goal. To reach their goal of $250K per year, they would need to have a rate of $167 per hour for 1500 hours billable. So you can see it gets tougher to meet our targets as we start to look at the top end of the market. Do you pay people this much? (I know those who do) Can you charge them out at almost $170 per hour? (many don’t). What if you bill them out at $155 per hour? Now, at 75% utilization, they contribute about $230k, or about 2.3x earnings.
A solid $80k per year engineer. Is 3x or a goal of $240k billable reasonable? If they're billing at $125 / hour, they would need 1920 billable hours, which is 95% utilization and won't happen. So we set the goal at 2.5x for them, or $200k billable per year. Now, that gives them a goal of 1600 billable hours, or about 80% utilized. That is the top end for us; we simply cannot pay more than that when our billable rates are at $125 per hour.
$40k per year technician who, at 3x, is expected to contribute $120k per year in billings. These people may still bill out at $100 per hour, so they only need about 1200 hours to meet their goals, or about 60% utilized. By setting a team bonus that requires all levels to get to 75%, we push everyone the same. So, we adjust this goal upwards to be $150k (1500 hours x $100).
To sum up, our ratios look better on the low end but worse on the high end, but by pushing all to the same goal, profitability is ensured at all levels. You could also argue that realized dollars are a sliding scale with top performers contributing more total dollars, and you’d be correct. In the above examples, contribution over pay would be: #1 (at $155/hour) would contribute $130k, #2 at $120k, and #3 at $110k. So, you can see the contribution starts to become very close, but the key is that all need to make their targets of 75% utilization.
Note that these numbers come from the likes of IPED and Service Leadership - those who study “best in class” in our industry, aka the top 20% of small VARs in North America. If you want to become “best in class”, the above numbers can be a good starting point.
What do you all think of the above? How does that relate where you are in the world? I'm very interested in hearing more.
Thank you for reading...
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