Utilization is one of the most widely used Key Performance Indicators (“KPIs”) in public accounting. Most firms will have target utilization rates for their non-equity employees, with particular attention given to associates’ and senior associates’ utilization goals. If you’re new to public accounting, utilization can feel like one of those enigmatic metrics that sets you up for failure: calculating it is relatively simple, but what your utilization actually means is entirely dependent on your situation.
At its core, utilization is a crude metric used to compare the effectiveness of employees. Firms rely on timesheet entries, collected daily or weekly from every client-facing employee, to calculate their utilization. The ease of calculating utilization is what makes it such a common KPI among public accounting firms. And while it is a simple calculation, utilization is fraught with common KPI issues that make it a sloppy choice for measuring individual performance.
To fully understand the utilization ratio, we’re going to start with outlining how companies calculate utilization, as it can vary slightly from firm to firm. Then we’ll discuss how the importance of utilization varies depending on your rank within the company hierarchy and your position amongst your peers. Finally, we’ll look at its shortcomings and how you can take advantage of these flaws.* As always, your results may vary.
How Utilization Ratios are Calculated
The standard calculation for utilization depends on two values:
- The number of chargeable hours you have worked in a given period; and
- The total available working hours in that same period.
Before we get into the math, let’s define a few terms. “Chargeable hours” are the hours you enter on your timesheet that were spent working directly on client deliverables. In short, if your work should result in a client paying the accounting firm, that work is chargeable. Any work done exclusively for the benefit of the firm (administrative work, internal projects, etc.) or exclusively for your benefit (studying for the CPA exam, going to the bathroom, etc.) is not chargeable. There’s a ton of gray area here, so make sure to ask your manager if you’re ever confused about something being chargeable or not. Managers love these questions.
The second important definition is what “same period” means for your firm. For one working week, this is mostly straightforward. Typically, one working week would equal 40 hours (8 working hours per day, multiplied by 5 working days per week). We’ll stick with this standard definition before diving into exceptions.
Math
Let’s first look at one working week first, then an entire working year.
You were relatively busy last week, and your timesheet indicates that you worked the following hours:
- 38 hours of chargeable work
- 5 hours of administrative work
- 3 hours of continuing professional education (“CPE”)
In total, you worked 46 hours out of a standard 40-hour period. Your utilization rate is 95% (38 chargeable hours, divided by the 40-hour standard work week). Kudos to you for doing your admin tasks and taking some CPE courses, but they won’t help your utilization.
Now let’s examine what these values might look like over a 52-week year:
- 1,998 hours of chargeable work
- 113 hours of administrative work
- 32 hours on internal projects
- 30 hours of CPE
Over the course of the year, you worked 2,173 total hours out of a standard 2,080-hour period. Your utilization rate is 96.1% (1,998 chargeable hours, divided by the 2,080-hour standard work year). Because your 2,173 total hours exceeded the 2,080-hour standard period, you can also confirm that you worked 93 hours of overtime, which is entirely unpaid if you’re a salaried employee. Gold star!
Once you’ve calculated your utilization, you need only compare your rate against the target rate set by your firm to determine if you’re exceeding or failing to meet expectations.
Exceptions
Because we’re operating within public accounting, nothing can be simple. Here are several common exceptions to the utilization formula above:
- Some firms will use a target number of working hours per year rather than the standard 2,080. This is particularly common for firms that expect employees to work longer hours during busy season. Common target denominators may range from 2,200 (~42 hours per week) to 2,600 (50 hours per week). And yes, if you’re a salaried employee, this implies that you will be working unpaid overtime.
- Some firms will count PTO hours against you, while others may have PTO hours help you. In the former case, your PTO hours will have no impact on the numerator or denominator in the equation. That means that for each PTO hour you take, you’ll need to work an additional chargeable hour when you return to offset the loss. This is common for companies with unlimited PTO.
In the latter case, PTO hours will reduce the denominator of the equation. For instance, if you were expected to work a standard 2,080-hour year, and you took two weeks of PTO, your denominator becomes 2,000. You’ll still need to work enough chargeable hours to meet your utilization target, but reducing the denominator makes achieving the goal marginally easier. This may occur in firms that have a fixed number of PTO days per year and encourage their employees to take all of them.
- If you’re on a specialized working arrangement, your numerator and denominator may look different from your peers’. For instance, if you negotiated a part-time arrangement to work 20 hours per week, your standard denominator would then become 1,040 instead of 2,080.
This list is not exhaustive, so if you have seen other unusual utilization calculations or situations, please share with the class in the comments below.
When Utilization Matters
The higher up in the public accounting hierarchy you are, the less important utilization becomes. In Knowing Your Place we discussed that associates are basically fungible. In order to differentiate between a swath of otherwise identical associates, many firms rely on utilization to grade them. Those who are meeting or exceeding their utilization goals will be recognized with a firm pat on the back and an enthusiastic (but probably meaningless) acknowledgement of their potential for early promotion. Those whose utilization is far below the average will often be summarily PIP’d or let go. As with many things in life, it’s considered a prudent career move for associates to either barely meet the utilization goal, or target the average utilization of their peers. Work too much, and you risk burnout; work too little, and you risk being let go.
For senior associates, the story is nearly identical. Seniors are the workhorses of public accounting, and are expected to be highly utilized. These expectations are intense, so seniors will have to deliberately start setting work-life boundaries or risk being overworked quickly.
Once you reach the manager level and above, utilization becomes less important. Managers and senior managers may still have utilization goals, but they also have a variety of other priorities. As a manager, if you’re hitting your sales goals, your clients like you, and your underlings are performing well, the likelihood that a partner is going to harangue you about utilization is pretty slim. The higher up you climb in public accounting, the more valuable your extraneous responsibilities become relative to chargeable hours targets. By the time you’re at the managing director and partner level, utilization is basically a check to determine if you completed your timesheet. Yes, timesheets are eternal and even partners aren’t immune from the burden.
Utilization’s Flaws
There’s an adage called Goodhart’s Law that states, “When a measure becomes a target, it ceases to be a good measure.” This is the core problem with utilization as a KPI.
Utilization is a measure. It provides a numerical value to how much time an employee spends on client work relative to their non-chargeable tasks over a period. When companies mandate utilization targets for employees, it ceases to be a good measure. Why? Because employees can and will manipulate their timesheets and work habits to achieve a utilization target. This makes them less efficient workers, and trivializes utilization’s intended purpose.
The second major issue with using utilization as a KPI is that utilization is mostly suitable for measuring a population. Utilization isn’t nuanced enough to capture the contributions of individual employees outside of chargeable hours. If your senior associate is particularly skilled at training peers and associates, her utilization will suffer. Training typically isn’t chargeable, but it’s a valuable contribution to the firm’s success that goes ignored by utilization.
An appropriate comparison for utilization is the Body Mass Index (“BMI”). The BMI was originally created as a way to measure if individuals within a population are overweight relative to their height. Like utilization, BMI takes readily available data (weight and height) and measures how individuals compare to the “average” person within their population. BMI becomes problematic when:
- It becomes a target (i.e. individuals are encouraged to achieve a BMI of 20, for instance).
- It is applied arbitrarily to compare individuals (i.e. Tom has a BMI of 34; Betty has a BMI of 20. Therefore, Betty is healthier than Tom).
Sound familiar? Because BMI considers only two variables about a person, it can paint a dramatically incomplete picture of someone’s health. In our above example, Tom’s BMI indicates that he is obese. But Tom is a professional athlete, and his extra weight is due to muscle mass. Even though he’s incredibly fit, BMI says Tom is endangering his health. Meanwhile Betty’s BMI indicates that she’s “normal weight,” but if she were two inches taller, she would be considered “underweight.” The metric struggles when a person is on the borderline between two arbitrary ranges, or when a person’s lifestyle doesn’t fit neatly into BMI’s parameters. Those readers who have experienced frustration around BMI targets and calculations know the pitfalls of the metric, and very similar issues apply to utilization.
If your public accounting firms are sticklers about utilization, you may hear things like “you will be eligible for promotion only if you hit your utilization target.” If your utilization target is 90%, and you only achieve a ratio of 88%, you still had a very productive year. But because the company arbitrarily drew the line at 90%, you’re ineligible to move up the corporate ladder.
Similarly, if you took on a lot of business development work to bring in new clients, you did a great service to the firm. The company needs new clients to continue growing, but those business development hours usually aren’t chargeable unless the prospective client signs an engagement letter. Even though you’re performing valuable work on behalf of the firm, your utilization won’t reflect these contributions.
Overcoming Utilization’s Drawbacks
Utilization is an overly simple metric that fails to achieve its stated purpose of comparing employee efficiency. Nevertheless, we’re stuck with it until the partners collectively decide to use some other KPI, so we should recognize how to exploit it.
The most obvious solution is simply to work slower. Utilization punishes efficient workers. If you finish a task in 10 hours while your peer finishes the same task in 20 hours, your utilization is worse. By working slowly, you can accumulate more chargeable hours over a period, boosting your utilization ratio. You may get an upset email from your manager if you blow up an engagement’s budget from charging too many hours, so there’s some trial and error to this method.
The next solution is to collect chargeable hours from a large number of engagements. Managers usually keep a keen eye on their engagement metrics, and they quickly notice if associates are charging a bunch of hours to a code but not producing much work. However, if you’re charging two hours per week to ten engagements, rather than ten hours per week to two engagements, you won’t raise as many alarm bells. Again, there’s some trial and error here, so be cautious before dumping hours into a code you didn’t actually work on that week.
If you have the opportunity to work on a relatively large engagement, or one that colleagues describe as a “loss leader,” these can provide a major boost to utilization. Large projects are often inefficient, and engagement managers regularly budget in extra hours to wrangle the complexity that comes with them. Similarly, loss leader engagements are those that the partners intentionally undersold, usually to entice a client to sign an engagement letter with the firm. Because these projects were undersold (meaning the partners are charging the clients less than they reasonably expect the project to earn), engagement economics matter less, and you can charge more hours without scrutiny. Both of these scenarios are specific to your situation, but keep an ear out for these opportunities.
Finally, a solution that will make the partners smile. The easiest way to increase your utilization is simply to fill out your timesheet every single day. At some firms, this is already mandatory; other firms will only require you to submit a timesheet every week. By submitting your timesheet daily, you can remember all the little tasks (drafting client emails, conversations about engagements in the lunchroom, getting yelled at by the client on the phone) that are easy to forget, but are also chargeable. Capturing all of those small increments of time can quickly add up to several percentage points on your utilization ratio. As a bonus, you’ll never have a delinquent timesheet again.
Conclusion
You’re smart, you’re reading the PA Almanac after all. You probably noticed that many of exploits for manipulating utilization result in the accounting firm or the employees working less effectively. This is the final shortcoming for utilization: if your metric is so ineffectual that 1. People feel compelled to manipulate it; and 2. Manipulating it results in worse outcomes for everyone, then the metric needs to change. We’re of the mindset that utilization no longer serves the modern public accounting firm as a KPI or published metric. It can be an informative tool for management to determine if as a firm, they’re spending an appropriate amount of employee time on chargeable work. But it should not be used as a grade for individual performance, nor as a target for determining employee effectiveness.
We encourage you to write your experiences and frustrations with utilization in the comments below. Timesheets and utilization battles are the most common gripes among public accountants, please share those war stories!
*Remember! Manipulating KPIs for fun is acceptable (and frowned upon), but do not manipulate KPIs for profit. Once you transition from “abusing loopholes to demonstrate systemic flaws” to “abusing loopholes to get a better bonus and promotion,” you open yourself up to a whole bunch of trouble.