Utilization is Archaic and Misleading

Utilization is Archaic and Misleading By David A. Fields

It’s hard not to laugh when recalling the sixteen German violinists who sued for higher pay on the grounds that they played more notes than musicians who toot trumpets or blow oboes. Judging the value of a performance based on the number of notes played is obviously absurd.

But not every ridiculous yardstick of value is so easy to spot. Back in the glory days of the dot-com bubble, Web sites were judged by the traffic they generated. On this basis, ExciteAt-Home purchased Bluemountain.com for $780 million. But neither hits nor traffic are the same as value and ExciteAtHome ended up selling the site to American Greetings for a mere $35 million—a 96 percent loss!

Which brings us to the world of consulting, where the value of a consultant is determined by billing rates and hours worked; i.e., utilization.

Old World vs. New World

Do you know where, other than the consulting industry, utilization is used as an important performance metric? Paper mills and other heavy industry, where gazillions of dollars in capex have been sunk into machines that spit out uniform products. When you’ve spent, say, $250 million on a new production line you want that puppy ticking along like a Timex watch—nonstop and uninterruptible.

In the case of industry, we have fat-cat owners of expensive machinery who want to maximize uptime; in the case of consulting we have jet-set employers who want to maximize billing time. In both cases the goal is to maximize utilization. This may come as a surprise to many firm leaders, but the similarity between capital assets and human assets is a thin one.

Here’s the major disconnect: consultants’ customers generally assign a higher value to less time, whereas utilization assigns a higher value to more time. When you flip the switch on a plastic extruder, every hour’s output is basically the same and, therefore, more hours are good. If customers are paying for Frisbees then, as long as the discs you produce are of reasonable quality, more hours means more happy purchasers flinging your product. In this case, that’s good.

In contrast, when you flip the switch on an enterprise-wide cost savings project, every hour of work invested does not produce the same value of output. Customers want results yesterday, and more hours means more waiting. In this case, flinging is bad.

Additionally, in my experience interacting with production equipment, I’ve yet to encounter a machine that will respond to an incentive or spontaneously boost productivity to win a coveted position. But show me a brand-name consulting firm, and I’ll show you cadres of eager beavers who stoked their creative fires and learned every trick in the book to win employment there.

Fundamentally, utilization is misleading and counterproductive in consulting firms. It measures nothing so much as face time and, perhaps, inefficiency. It creates an incentive for consultants that conflicts with their customers’ desires and it rewards bad behaviors. Oh, and it also fits synergistically with the antiquated, hourly-rate approach to pricing consulting services. Other than that, it’s fine.

The Source of Befuddlement

Why is utilization so prevalent? Three reasons:

  1. As I mentioned, utilization meshes easily with the hourly billing method. Understanding how many man-hours it takes to complete a project is good practice, but best practice is to use that information to reduce the number of hours a project takes.
  2. Utilization is the natural result of a firmly embedded success formula in consulting: It doesn’t take an MBA to see that three paths to a fatter wallet are increasing billing rates, utilization and leverage.
  3. Consultants like to measure things and are susceptible to the McNamara fallacy: 1. Measure whatever can be easily measured. (This is okay, as far as it goes.); 2. Disregard that which can’t be easily measured. (This is artificial and misleading.); 3. Presume that what can’t be measured easily isn’t important. (This is blindness); 4. Say that what can’t be easily measured really doesn’t exist. (This is suicide.)

A (Somewhat) Easy Fix

ExciteAtHome mistook hits for value, forgetting the profit produced by a Web site. Consultants mistake billable hours for value even though the legitimate value is sitting in front of our collective nose: project revenue. When the client ascribes more value for less time, which is the case for enlightened clients, the effective billing rate is astronomical.

Now it’s obvious that your Holy Grail is value produced, not hours worked. Those are two totally different kettles of mackerel. Throw away utilization and billing rates, both of which are archaic and misleading, and set your sights instead on project revenue/employee. How do you measure and track this? Quite simply—every project has a finite fee, which can be divided among the people who contributed to bringing that revenue into the firm. Setting up the accounting and tracking for this approach, which is based on productivity, not utilization, is surprisingly easy.

In utilization, inefficiency and facetime are rewarded. Here’s what is rewarded under the new regime:

  1. Great ideas. As people contribute exceptional new solutions to client problems they earn a piece of the IP split. Since strong intellectual property has the value and staying power of gold, incentives to create new IP are good for the firm and the consultants.
  2. Great work, and fast efficient work. Productivity perfectly aligns us with our clients’ interests. Everyone benefits when an outstanding solution is achieved as quickly as possible. The approach rewards consultants who finish projects quickly, and bestows a share of follow-on projects as a reward for outstanding work.
  3. Relationships and relationship management. Relationships will always be the lifeblood of our profession, which is reflected by the splits of fees. Some firms opt to separate out the selling and relationship aspects by tracking “revenue under management.”
  4. Ability to close sales. Developing rainmakers is critical to growth, and the productivity approach directly rewards those who bring in business.

Putting Productivity to Work

A few notes on moving from utilization to productivity:

  • If you’re still billing by the hour and your clients are, inexplicably, still paying you based on the number of hours worked, then you’ll have to focus on external education in line with your internal evolution. You need to open your clients’ eyes to the error of their ways and change your billing approach. At the risk of being self-serving, The Executive’s Guide to Consultants is an excellent tool for this purpose.
  • A firm instituting productivity must have a collegial culture with strong partners at the top. Allocating project revenue is not a surgically precise exercise, and sharp elbows can become common if consultants forget the value of long-term relationships with their colleagues. In most cases internal competitiveness is kept in check by cultural norms and a firm, fair arbiter at the partner level. In addition, typically an estimate of splits is made at the start of a project then finalized once all the fees have been collected.
  • Similarly, you’ll need to keep an eye out for consultants who create “new” intellectual property that has no meaningful benefit over the existing tools, templates, approaches and processes. One way to do this is to allocate the IP portion of the project only to ideas developed prior to the sale, rather than concepts developed during the project.
  • Finally, you will need to make a few systems and process changes. Consultants will somehow have to be convinced to stop filling out detailed time sheets. That should take about three seconds. A new system should be put in place that tracks revenue splits, linkages between projects (to allocate follow-on revenue) and IP contributors. These new systems are surprisingly simple, even in the largest firms. Focus your attention on productivity rather than utilization, and you will be rewarded with a more successful consulting firm

David A. Fields, author of The Executive’s Guide to Consultants (McGraw-Hill, 2012), is dedicated to making consultants successful. Email David at david@davidafields.com.