Understanding your agency’s profit levers: utilisation rates

Image for Jay Neale By Jay Neale

Essentially, agencies sell their people’s time. So the more hours you sell, the more revenue you make. Easy. Yes, so far. But there are, naturally, complexities.

And this is where you need to know more about your team’s utilisation rates.

Utilisation rates are much mentioned in the agency world. But what exactly do they mean?

Utilisation is the percentage amount of time someone spends on work the agency is paid for versus work it isn’t paid for. Their ‘billable hours’. To find the utilisation rate of an individual, divide their billable hours by their total number of working hours, and you’ll get the percentage. From here, you can work out how much revenue you could effectively bill over a period of time.

Navigating billability

So why would someone be doing work an agency isn’t paid for? In terms of account managers, finance teams, sales etc, the answer is obviously that their hours aren’t billable. But for creatives, you have to take into account admin time, loo breaks, tea breaks, lunch, internal meetings. At best, the most you can expect is seven hours billable time in a seven and a half hour working day.

Senior staff, too will have other management responsibilities, leading to higher internal time and lower utilisation.

What else? You also need to look at special internal skills or one-off projects. For example, you might be revamping your website so your designers will partially be working on that, instead of for clients.

In fact, the only people you can expect to have a 100% utilisation rate are freelancers, who you only pay for their output.

It’s a whole melting pot of whats, ifs and maybes. And in my experience, the best way to boil it all down and get some real answers is to look at each person within each agency on an individual basis. A midweight designer in one agency is not necessarily completely equitable with their counterpart in another agency. So it’s not a case of utilisation by role, but by person.

Three steps to calculating accurate utilisation rates

There are three steps to understand where people spend their time and following these will help you create a realistic pattern of utilisation.

1 - Staff interview

Or as I prefer to call it, talking to people. Ask them how much time they spend on client work. What else are they doing? Speaking to their manager often takes you to a dead end, as they don’t always know the minutiae of everything every team member does. Yes, you want your client billable time as high as possible. But you also have to be realistic that there is a certain amount of non-client facing time for each role. This can be a real incentive to employees, too. They’re essentially setting their personal targets and owning them.

2 - Look back, look forward

To get an accurate picture of time spent, you really need to look at a full working year of timesheets. If you just do a month or two you could catch someone in holiday season, or when they’ve been temporarily working on an internal project. The broader the timeframe, the better.

Remember too, you need to communicate the importance of accurate timesheets to your teams. Creatives might feel compelled to log time they’re not spending in order to justify their working day. Account managers might want to make their project look good.

But it’s not about looking good or justification. It’s about planning realistic capacity, estimating properly and not overservicing. As well as looking back, you can plan ahead. Have you got any major internal projects coming up which will divert certain people’s time? This goes back to the ‘individual’ aspect. Which of your team are you likely to use most for non-client work?

3 - Make a spreadsheet

A good old spreadsheet comes into its own here. You can map each employee’s utilisation, taking into account things like part-time hours and holiday allocation. You obviously can’t plan for sickness, but do allow for admin, new business, meetings, training and so on. Then you can share with each team member for their sign off and agreement.

Once you’ve got the utilisation rate for everyone, you can calculate the expected revenue per person, per team and for the agency overall.

Total number of hours per year x % utilisation rate (% chargeable) x hourly rate = target revenue per person/team/agency per year. Divide by 12 to get your monthly average.

Remember to use workable hours per day and year for each person, taking into account their working hours, holiday allowance and public holidays.

Using your utilisations

Now you’ve got the figures, you can start doing some planning and analysis. Are these forecasts acceptable, or do you need to increase revenue? If so, how will you do this? Did you meet your targets - and if not, why not?

Utilisation rates might not sound exciting for a creative agency. But teams soon get the picture when they realise their talents will be used to best effect. People will shout up if they’ve nothing to do or ask for support if they’re overloaded. You’ll be able to see accurate revenue targets and strategically plan ahead.

And above all, you’ll stop stagnating and start seeing some real profits.

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