Today I want to touch on one of my favorite topics — and as a finance fanatic, the answer here shouldn’t come as too much of a surprise. Let’s talk about the often convoluted but easy-to-understand idea around employee utilization.
For a service-based business, you have 40 hours in a work week and an employee base meeting those hours with both billable and non-billable tasks. Employee utilization in relation to this scenario aims to measure both how effectively your resources are being managed, and how efficiently your people are operating when on the clock.
Another way to think about this is in terms of KPIs. Your KPI for direct labor is a measurement of the constant percentage of revenue you need to invest in people for your organization, in order to see that revenue number continue to increase. Dig a layer deeper and those people sitting in their seats, making sure they’re doing what they’re supposed to be doing and doing it efficiently is utilization.
Why is employee utilization measured?
When measuring employee utilization, you’re essentially asking yourself, “What percentage of an employee’s work week are they expected to be billable in order for my business to remain profitable?” This requires both an understanding of said employee’s responsibilities and the goals they’re helping you work towards achieving on behalf of your business.
With that understanding, you’re able to then tie tangible metrics to an employee’s efficiency (i.e. calculate their rate of utilization) and be better informed to take action in instances where expectations fail to align. For example, say you’ve calculated the rate of utilization for a department to be 85%. You now know that within a 40-hour work week, those employees are expected to work 34 hours on billable tasks.
If they fail to meet that mark, you’re made readily aware that there may be a story worth digging into. Because someone working at a lesser rate is not always an indicator of poor performance. It could be a result of vacations taken or time spent on other areas of benefit for both employee and business, such as professional development.
On the flip side, a measurement of employee utilization can bring both performance weaknesses and strengths to light. This gives you better standing to identify traits and skill sets on the team worth duplicating in future hires; and an ability to cut the cord when a relationship just isn’t the right fit.
Who’s responsible for utilization?
Responsibility when it comes to employee utilization is two-fold. Firstly, it falls on the management team to ensure their team has enough work. They also need to create a culture that best lends itself to efficiency by providing employees with the tools and resources needed to get their jobs done.
Alternatively, employees are the ones responsible for actually doing the work. They need to be managing their own workload, prioritizing tasks accordingly and proactively raising the flag in the instances where they may not be properly set up for success.
When does measuring employee utilization fail?
Like any metric you may be keeping an eye on as a growing business, if not done correctly or analyzed for the sake of bettering your business, its purpose can quickly get lost in the shuffle. Here are some instances in which measuring employee utilization can fail.
- You don’t manage expectations. If you don’t communicate what’s expected of your team to your team, how can you expect them act on it? This is true of employee utilization — teams need to be lead accordingly based on the goals that have been set forth for them.
- Employee satisfaction is low. Similarly, employees should feel encouraged to do the work their expected to do. Not creating a culture that fosters some kind of passion for the task at hand makes it much more difficult for efficiencies to improve or even remain constant.
- You’re not auditing your own time. Do as I say, not as I do doesn’t really apply to situations of employee utilization. Especially as you begin to make the shift from entrepreneur to CEO, understanding your own self utilization is key to understanding how your pie chart of responsibilities will need to shift via delegation for the sake of accelerating your business forward. Another way to think about this point specifically is: What is your time really worth to you?
Ready to put some percentages around the utilization of your own small business workforce? That’s where we come in. Book a time to chat with CEO Rebecca Berneck or download our eBook, Financial Management for Small Businesses for a glimpse into how the Officeheads team operates.