Utilization is a Lousy Metric

Haaaappy Friday,

The culture of an organization is whatever its leaders (especially local) talk about most. Optimally, it should be the organization’s values, impact, and mission, i.e., why people work there and why they should care.

Too often, though, performance metrics, especially utilization, get talked about most consistently even though most people have only a limited ability to control it. As a result, metrics quietly become the culture. Uninspiring.

Performance metrics matter a LOT. Consulting is a high-cash-in, high-cash-out business that demands close attention. But performance metrics exist to help leaders lead, and should be managed discreetly with the project managers who can control them, not widely broadcast in a way that erodes morale and the mission.

Ironically, the metric that gets obsessed about most is also the most flawed. Utilization. And the more in-your-face it is, the more flawed it gets.

You can hit all your utilization targets and still be losing money if 1) those hours are spent on low-multiplier or under-priced projects, or 2) leakage and write-offs from budget overruns, scope creep, inefficiencies, slow-paying clients, and voluntary employee turnover are erasing profit.

Predictably, the more an organization stresses utilization, the more project write-offs it gets. Especially when utilization is known to affect bonus and employment. Push hard on that single metric, and you create a strong incentive to continue charging to open job numbers and to keep projects going. Being over budget is more easily explained away.

Utilization only tells you how busy people are, not how profitable that busyness actually is.

These two metrics are more meaningful:

Effective Multiplier: This shows the revenue you actually received for every dollar paid in direct labor (billable staff). This is your true (not target) multiplier.

Realized Rate: This shows revenue received per billable hour after all the write-offs, discounts, non-paying clients, and slow-walking. This is the organization's true average hourly rate. Useful for spotting leakage, it can help you make better decisions about job types and clients to avoid.

These tell you the actual realized value of the time you’re selling, not just how busy everyone is. Much more relevant and useful tools than utilization alone.

Punchline: It's worth monitoring, but by itself, utilization is a lousy metric that incentivizes leakage, especially budget overruns. Think whack-a-mole. Metrics are tools to help leaders lead. However valid a metric may be, it's ultimately counterproductive if it demoralizes the business (the staff) or erodes or replaces the nobility of the organization's mission.

Have a mission-focused and profitable week ahead,

Dave

Feedback and blowback are always welcome: dave@goodnewsfriday.com

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