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:
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:
Putting Productivity to Work
A few notes on moving from utilization to productivity:
David A. Fields, author of The Executive’s Guide to Consultants (McGraw-Hill, 2012), is dedicated to making consultants successful. Email David at email@example.com.