In an earlier post (see Revenue Recognition – is it really necessary?) we discussed the calculation and recognition of revenue.
In that posting the importance of calculating and reporting revenue by project and period were discussed. Equally as important however is being able to determine revenue by employee. But why?
Calculating and reporting revenue by employee is important because this is one of the key performance indicators that professional service organisations require to effectively manage the business.
In essence a professional services organisation is selling time. Time is the stock in trade. Like any business an organisation needs to understand what this time is costing them and what they are selling it for. They also need to understand how much time they have available to sell and then report how much of the available time was actually sold.
For a given period an organisation has a certain amount of time available to sell and will sell a certain amount of that time. Because the amount of time available to sell will fluctuate period by period it is easier and more consistent to report the amount of time sold as a percentage of time available. This is referred to as ‘Utilisation %’.
Understanding what % of time was sold for a period is great but to fully understand how well the organisation performed we also need to know what $ rate per hour this time was sold for. It would be relatively easy to sell time at a very low $ rate per hour however if this rate is below the $ rate per hour cost to the organisation then the organisation will soon be in financial difficulty.
Following is an example scenario:-
Employee:- Andre Perez
160 – Total Hours
40 – Billable Hours
120 – Non Billable Hours
Equates to 25% Utilisation
If the loaded cost rate for this employee is $40 per hour and the average hourly charge out rate is $160 per hour then based on the above utilisation the employee is just break-even:
Revenue $160 x 40 hrs = $6,400
Loaded Cost $40 x 160 hrs = $6,400
The two important measures here are Utilisation % and Revenue per Billable Hour. An increase in Utilisation % or Revenue per Billable Hour will result in an increase in the total revenue generated by the employee.
As a guide professional service organisations should be aiming for Utilisation % of 75%. Ideally an organisation will have available benchmarks for their industry and location to determine a realistic Utilisation %.
Utilisation should be calculated as Billable Time / Capacity Hours = Utilisation %
Note that Capacity Hours are used and not Available Hours. While an employee may be paid to work 40 hours per week (Available Hours) it is possible that they have performed some tasks that means they are unavailable to perform billable work. For example they may have had to attend a one day personal development training session in a given week. In this case the employees capacity in that week would be 32 hours and not 40 hours.
Revenue per Billable Hour
The ‘Revenue per Billable Hour rate’ that is achieved by an organisation is subject to influences such as locality, industry, service provided, employee qualifications and skills and others. Of importance is that your hourly charge out rate is reasonable for your industry and that the ‘Revenue per Billable Hour rate’ achieved is comparative to that achieved by your competitors..
Other topics for future discussion regarding these KPI’s include:-
- Forecasting Utilisation
- Subcontractor Utilisation
- Level of granularity for reporting Utilisation % and Revenue per Billable Hour
- Can Utilisation reporting assist project tracking and project management