Any business needs to have a firm grasp on employee utilization within their organization to improve their profitability. However, it’s also crucial for HR professionals to understand this business metric to improve the hiring process, create a healthy work culture, and boost productivity.
Keep reading for everything you need to know regarding employee utilization as part of HR to support and nurture your employees at work.
What is employee utilization rate?
Employee utilization refers to the amount of an employee’s working time that is used for billable work.
Employee utilization rate is the percentage of an employee’s total working hours spent doing work that can be billed vs. administrative tasks.
The employee utilization rate is most often used in professional services and service-based organizations. However, other organizations can also use it as a key metric to measure their team’s current productivity.
To calculate an employee’s utilization rate for a specific period (e.g., a week, month, or year), you need to know the total number of hours they worked and how many of those hours were billable.
In most job roles, an employee will not spend 100% of their time during a project on billable work. This is because most projects usually require administrative tasks, including sending emails, having phone calls, and attending meetings.
Why track employee utilization?
Employee utilization rate may appear as a simple measurement. Still, measuring and tracking this can positively affect your employee’s engagement and productivity levels at work. Knowing your employee utilization rate will also enable an organization to set profitable rates for services, compensate your employees fairly, make more informed hiring decisions, and determine whether employees are being overworked or underutilized and implement changes as an HR department.
This measures how effectively your employees are operating and how effectively your organization manages its resources. Each employee should be fulfilling their job description and helping the organization see continual increases in revenue. How many hours of an employee’s working week need to be billable for your business to remain profitable?
Once you have a clear idea of the rate you’re looking for in different departments, you can then see whether that rate is being met. Measurement of employee utilization will highlight both performance strengths and weaknesses. It helps the organization close the gaps and double down on what’s working.
How to calculate employee utilization
There’s a simple formula to calculate employee utilization rate:
Utilization Rate = Billable Hours / Eligible Working Hours
Let’s look at an example of this in practice.
Charlotte is a graphic designer at a marketing agency.
She has a contract of working 40 hours each week, which works out at 2,080 hours per year. Let’s assume she has four weeks of vacation each year, along with a few days where she’s sick or absent due to training. This brings down her total hours available each year to 1,880.
Next, let’s assume that 1,500 of those hours are spent on billable work. We are then able to calculate Charlotte’s utilization rate by doing the following sum:
1,500 / 1,880 = 0.79
This means Charlotte’s average employee utilization rate is 79% because she was 79% billable.
It’s important to note that most employee utilization rates will never reach 100% due to the need for internal work (e.g., meetings, training, and admin tasks).
Most organizations will aim for around 80% utilization to account for these other tasks and commitments. However, on some rare occasions, there will be exceptions to this. For example, in demanding law firms and investment banks, employees may be required to work late into the evening and on weekends to reach a higher utilization rate. But as a general rule, this is not desirable as a long-term strategy, and most businesses target 80%.
Most organizations will set target utilization rates for their employees while factoring in the number of hours they need to spend doing non-billable work and the number of billable hours required to maintain profitability.
Target rates will vary between departments and job roles. Front-line employees will generally have higher rates. Managers tend to have lower rates as they spend more time managing other people and attending meetings.
How to track employee utilization?
Now that you know how vital your employee utilization rate is, let’s look at how you can support managers and teams in measuring it effectively to continue driving profits and productivity within the organization.
Tracking productivity & utilization
How can you manage what you’re not measuring?
The answer is, you can’t!
On the surface, an employee who comes in early and leaves late at night may appear to be working harder and doing more than an employee who only works between their given contract hours. However, this is not an accurate measure of how productive an employee is or how effectively they spend their time and energy.
Many employees work fewer hours and achieve their targets simply because they are more organized and work more efficiently. The number of hours alone does not necessarily equal results or drive profits. It’s about how productive those hours are and how they’re directly contributing to better results.
The first step to tracking employee utilization is to have a dedicated time-tracking or scheduling software in place. This enables your organization to track employee hours against different projects and activities. Over time, this data will give you a better understanding of how employees spend their time and how productive that time is.
The tracking may be as simple as billable and non-billable projects, productive or non-productive work. It also may be more complex and include various categories like research and development or entering new markets—both of which will drive profits in the long run.
Analyzing the data
Tracking this data will enable your organization to produce an employee utilization report which can then be analyzed.
This will give the company a solid understanding of the employees’ quality of work and the results this produces in terms of your offerings to customers and your overall numbers.
Depending on how large an organization is, it may be beneficial to analyze data across different roles, skill-sets, and departments. This can help give you a more substantial overview of the business structure as a whole.
Regardless of which metrics your organization chooses to measure and analyze, it’s important to keep in mind that other factors may be influencing the results. For example, how effective your planning is and the performance of managers.
What can HR learn from employee utilization rate, and how can you help optimize it?
Although employee utilization is often used as a metric to measure and improve profits, its main focus is employees. This means there are valuable lessons and opportunities for HR departments to learn from the employee utilization rate and better support the organization’s people and culture at large.
Here’s what HR can learn from employee utilization rate and how they can help optimize it:
Make better hiring decisions.
The departments and employees with the highest utilization rates are more in demand and providing the most value. Likewise, the employees with the lowest utilization rates show you your least productive people. They are most likely not a good fit for their role or are not receiving adequate direction or training.
Once you know which skills are most valuable to your clients and which employees have good utilization rates, you then have a clear picture of which skills you need more of.
As an HR department, you can then seek more people with skills that meet your client’s demands and hire fewer people who don’t. This is likely to lead to increased job satisfaction, decreased staff turnover rates across the business, and increased profits.
Create a collaborative work environment.
A key strategy for increasing productivity and utilization is empowering your employees and encouraging them to share ideas and knowledge and work together on projects to achieve shared goals.
To achieve this, ensure the organization’s goals and wider vision are made clear by managers and regularly updated and conveyed to all employees. Encouraging discussion and collaboration can be facilitated by break out areas and inspiring communal spaces where employees can exchange ideas. Pairing employees up from different teams on specific projects could be another way to increase problem-solving and efficiency on tasks.
Another critical role for HR is to ensure each employee believes their contribution is recognized and valued.
Improve overall health of the organization.
When your employees are happy and thriving, your workplace culture will be a happy and healthy one.
Monitoring utilization rates can help ensure your employees are happy daily and feel they have the right knowledge, support, and tools to successfully perform their role.
A low employee utilization rate may indicate that an employee is not a good fit for their role or that they need more training or managerial support.
Prevent worker burnout.
You must also monitor an overly high utilization rate. It can give you a strong indication of anyone being over-worked and at risk of burnout or severe stress.
While any business naturally wants to increase its productivity rates and drive profits, this should not be at the cost of your employee’s wellbeing. This may help achieve results in the short-term, but it is not a successful long-term strategy.
Ensure managers are not pushing their teams too hard to boost utilization rates. If there is any sign of employees being at risk of burnout, notify the appropriate managers as soon as possible and work together on finding a healthier balance.
Give employees a chance to excel.
The other side of the spectrum from burnout is, are your employees being challenged enough?
Do they have enough variety and challenges in their role to feel excited and engaged at work?
Are they making full use of their natural strengths and talents?
We know it makes sense to encourage and empower employees to use their natural strengths at work, but how many organizations actively encourage this outside of Silicon Valley startups?
Gallup analysis has found employees who use their strengths at work consistently outperform those who don’t.
Employees who use their strengths every day are:
- 3 x more likely to report having an excellent quality of life
- 6 x more likely to be engaged at work
- 8% more productive
- 15% less likely to quit their jobs
Promote fair pay.
Incentive pay is when employees get rewards such as bonuses or other forms of compensation to go above and beyond in their job and achieve top results. For example, many people who work in sales receive bonuses for exceeding their sales quota for the month or year.
Incentive pay can help incentivize employees to go the extra mile and be more productive at work.
Does your organization currently offer any incentive pay? And are you overpaying underperforming employees with low utilization rates?
It’s also essential that you consistently promote a fair pay system across the business. A compensation analysis can help determine whether your organization currently rewards employees for the work they do and how to set up a fair pay system while considering utilization.
Measuring employee utilization rates will help improve your people strategy.
Tracking and analyzing employee utilization rates in your organization enables you to improve your people strategy and create a healthier work environment where your employees are happy, engaged, and productive.
Improving utilization rates will take time and careful planning and execution of strategies. In return, it will lead to increased profits in the long run. Remember to manage expectations, set reasonable goals, and incentivize your teams to boost their efficiency.
If you want to future-proof your HR skill set and develop new HR competencies, check out our All You Can Learn Certification Program!