How To Calculate Utilization Rate

May 13

Is your agency being as efficient as possible without creating burn out? The last thing you want for your culture is for your employees to feel overworked and dread coming in. Let us guide you through how you can ensure your employees aren’t overworked or under utilized.


What is utilization?

Utilization is the amount of an employee’s available time that is productive and billable. The utilization rate formula is your billable hours divided by the number of hours available. For example, if you have an employee that worked 32 hours of a standard 40 hour workweek, their utilization would be 80%. To accurately calculate utilization rate, you’ll need to ensure your team has a time tracking strategy built-in. 


Why is this number important?

Once you calculate your utilization rate, it’s time to dive into what this number means. Utilization rate is the leading indicator for gross margin and profit. Along with this, it can help you decide if your team is being underworked or overworked. Do you have the capacity to take on additional projects, or is it time to hire someone new to aid your team?


The next question you're probably asking is, what is a good employee utilization rate? A target number to strive for across your service team is around 70%-80% utilization. If you have team members with really low utilization rates, this is a direct indicator that your team is ready to take on more projects. On the other hand, if you have a team member that has a high utilization rate, you may want to reallocate some of their workloads to another team member or consider expanding your team. 


Each employee may have a different utilization rate to calculate, and it’s important to analyze each person’s data! Say you have a team of designers and their utilization rate is 50%, while your team of developers has a utilization rate of 120%. You won’t want to hire another designer, as your current team has the capacity to take on more projects. Instead, you want to take some of the workload off of your developers by hiring another team member here!


While we recommend a blended utilization rate of 70-80% across the entire service team, some individuals or teams may carry a different target rate than others. This choice is based on two primary factors: 

  1. What level of leadership or sales involvement do you expect for them (e.g. non client time)? 
  2. How long does it take to hire someone new in that function? 

When you apply those considerations, what often happens is that the more junior, recruitable, and production-oriented teams carry a higher utilization rate (80-90%) and the more senior, harder to hire, and leadership or sales adjacent teams carry lower utilization rates (under 70%). These choices ultimately boil down to leverage - which is your ability to create a blended team of lower salary, higher utilization roles and higher salary, lower utilization roles to arrive at a blended utilization of 70-80% and a gross margin in its ideal range. 


Regardless of its construction, it’s important to keep an eye on utilization and its fluctuations to ensure you’re making the right decisions for your team. It can let you know if you’re understaffed, overstaffed, or if your business is functioning efficiently or not. It can be the data that backs up your decision-making; no need to fly in blind!


Interested in learning more? Contact us and check out our Creative Outcomes Podcast for further discussion:


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