Billability is often confused with billable utilization. Do you know the difference?
In professional service firms, billability is an essential concept. It’s about your ability to charge clients for your resources’ time.
However, it’s often confused with the complementary concept of billable utilization. And that’s sometimes mixed up with resource utilization in general. Then you start talking about employee realization rates - and suddenly it’s a whole mass of confusion.
This article will help you understand the concept of billability – what it is, why it matters, and how to optimize the billable hours of your client-facing colleagues.
In professional services, billability is how much time someone can spend on billable work. It’s often confused with billable utilization – which we’ll get onto next – but isn’t quite the same. Billability also means different things in different contexts.
This is about whether a role has the potential to complete billable work or not. Think about a consultant versus a resource manager.
When it comes to billing the client, the firm will charge the client directly for the billable hours performed by the consultant, while the costs associated with non-billable roles are factored into overhead and included in the firm’s billing structure that way.
It’s important for professional service firms to get the balance right between billable and non-billable roles to ensure the business can service clients in the most efficient, cost-effective, and profitable way.
This is about the potential and capacity of someone in a billable role to complete revenue-generating work. It’s influenced by various factors like:
This describes whether a task can be billed directly to a client or not – billable vs non-billable work. Let’s take a look at some day-to-day tasks for a consultant. You’ll see most are billable. But some non-billable hours are unavoidable.
Billable utilization is what most people mean when they talk about billability. This is concerned with how much of someone’s time is spent on billable work, compared to non-billable tasks.
It’s a key metric for tracking profitable productivity as it shows what proportion of someone’s time is spent on client-facing work that brings in revenue.
As in the table above, billable hours refer to work that can be directly charged to a client. Think of any movie where a hotshot lawyer meets with a client and starts their watch to bill every second of that conversation—that’s billable utilization in action.
Not every task in a professional service firm is billable though. Essential tasks like admin, emails, and internal meetings are non-billable. They keep the business moving but they don’t directly generate revenue. So they need to be kept in check.
Measuring the billable utilization of billable staff helps an organization strike the right balance between billable and non-billable hours – to keep the business progressing but also making a healthy profit.
The formula for billable utilization is (Total Hours Worked/Billable Hours) x 100
Say you work 40 hours this week and 30 hours are billable, you have a billable utilization rate of 75%.
That means a high proportion of your time was spent on revenue-generating activities, which is the main objective of professional service firms.
If you only worked 40 hours but only 10 are billable hours, that’s a billable utilization rate of 25%.
That means you’re spending three-quarters of your time on work that isn’t directly generating revenue. This isn’t the most profitable use of your time and needs addressing to understand the root cause.
Billability and billable utilization are important to track because they help you improve your profitability and return on resource investment.
Professional service firms don’t turn cloth into clothing, or raw ingredients into ready meals, they turn employees’ expertise into revenue. And because that expertise is sold in days and hours, you need to sell as much of that time as possible to maximize revenue generation.
Tracking billability – the extent to which their employees’ work is billable to clients – ensures you have enough billable roles and resources, capacity, and skills to meet current demand – both in terms of productivity and profitability.
Tracking billable utilization – the proportion of total available hours spent on billable work – ensures your billable resources are appropriately focused on client-facing tasks. If you spot that billable utilization is below par, you can take action to increase resources’ revenue-generating activity.
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Work out what counts as billable and what is non-billable, so that everyone in the organization works from the same criteria when assessing utilization.
Aim for around 85% utilization rate. This gives resources buffer time to deal with the unexpected, like helping a colleague or responding to a crisis. Within that utilization, expect 85% of time to be billable. This gives resources sufficient time to complete essential non-billable work without burning out.
Use time-tracking software that can record billable and non-billable hours easily. If you need to introduce time-tracking software, do so carefully, mindful that people may have anxiety around its introduction. Discover how to introduce time-tracking software.
Make it easier to monitor utilization metrics with a resource management platform like Runn. Automated utilization tracking tools visualize real-time utilization rates, using intuitive charts and heatmaps, so you can identify any issues immediately.
If you identify any resources that are being underutilized – whether that’s billable or non-billable work – address it. Look for opportunities to reallocate tasks to optimize utilization and create more equitable work distribution between resources.
Remember, overutilization is as bad for business as underutilization as it leads to decreased productivity, mental acuity, and engagement. Read about the problems of 100% utilization.
Use utilization data to forecast demand and implement more strategic workforce planning. Understanding capacity and utilization better can reveal opportunities to balance workload, redeploy underutilized resources, recruit for in-demand roles, and more, so you can meet client demand cost-effectively.
If certain resources have reduced billability and utilization – perhaps because of a shift in the type of projects you deliver and the skills you need – use bench time for upskilling.
Upskilling under-utilized resources makes them more adaptable and valuable to your business, as you can transfer them to tasks where there is more demand.
Remember, billable hours aren’t everything. They are crucial for revenue but non-billable work – from essential backroom operations like resource management, to using billable staff on internal initiatives – play an essential role in day-to-day operations and long-term growth. Discover a kinder way to interpret utilization rates.
Resource utilization tools – like Runn – take the guesswork out of optimizing billable utilization.
With Runn, project and resource managers can ensure people are engaging in the right type of work to create the impact they need to – whether that’s billable work that boosts revenue, or behind-the-scenes essentials that keep the wheels of the organization turning.
Runn’s provides insights into utilization, billable utilization, capacity, availability, and more – making it easier to get the balance between billable and non-billable hours right – giving teams the power to increase profitability without overloading staff.
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