Agency utilisation rates
Agencies and consultancies make money by selling the time of their specialists to clients. An agency’s utilisation rate is a key metrics for profitability and understanding company workloads.
In this article we’ll look in detail at agency utilisation rates and how they can be improved.
What is a utilisation rate?
Utilisation rate is the expression, as a percentage, of the proportion of time billed, out of the total time available to be billed. This can be applied to an individual, a whole department, or an entire agency.
Utilisation rate = Time billed / Time available
The amount of time available is limited and reduced by the following factors;
- Contractual hours of employee
- Holiday allowance
- Public holidays
This results in the total amount of time you can get from your employees. However, not all of this time will be potentially billable. There will be non-billable activities that your employees undertake. This can include;
- Business development
- Internal work
- Team building activities
Once all of this is taken out you are left with the amount of time available to do billable work for clients.
A high utilisation rate means that your resources are overworked. A low utilisation rate may mean your specialists have the capacity to do more billable work.
How does utilisation rate affect profits?
It may be obvious that increasing utilisation leads to more profit. What may be less obvious is the highly leveraged nature of an agency or consultancy and the disproportionately large increase in profitability that can come from a small increase in utilisation rate.
An agency has a fixed cost base where the biggest cost is people’s salaries. Take an example agency that consists of 15 specialists. The agency’s fixed cost base of salaries, office costs, other overheads etc., might be around £1.6m. Assuming 223 working days per year (after holiday and sickness), and assuming that another 32 days are given to non-billable work, then the agency has 191 potentially billable days per year per specialist. Assuming an average billable rate of a specialist of £900 per day, then the agency would break even at around 60% utilisation. A 65% utilisation rate would give a £121k annual profit. An increase to 70% utilisation would more than double that profit to £250k. This shows the large impact that a small change in utilisation rate can have on profits, and therefore why utilisation rate is such an important metric for agencies.
Agency Pond can help you increase your utilisation rate by allowing you to loan your specialists out to other agencies when your specialists have no billable work available.