All too often, creative agencies and consultancy firms see billability as the ultimate way of calculating and optimising their efficiency. However, evaluating solely on the basis of billability can cause serious damage to your business, for three reasons.
What is billability?
Much has been written about billability. But what it really means is still a mystery to many. Wikipedia – the source for any quick search – offers no solace with the vague description: ‘The state or condition of being billable’.
We use a more conventional and useful definition of billability: ‘the percentage of billed hours versus the total hours’.
Creating a potentially distorted picture
Keeping track of the hours worked – with a distinction between billable and non-billable hours – is totally normal. Indeed, it gives you an answer to the question: has someone worked for enough hours?
But evaluating staff on the basis of billability is not a smart move. Because at first sight, it appears as though staff with the highest billability contribute the most to your organisation, and as though staff with a low percentage of billable hours are ‘wasting time’. But this reasoning is often flawed, and there are three arguments for this.
1 You’re not comparing like for like
Different organisations and subsidiaries calculate billability in different ways, making it impossible to compare.
Based on the number of hours recorded.
Example: an employee works 40 hours, 32 of which are billable. Their billability is thus 80%.
Based on the gross capacity.
Example: The employee is sick for 1 day. For the remaining days, they work 32 hours, 28 of which are billable. Their billability is thus 70% (28 billable hours / 40 hours).
Based on the net capacity, excluding holidays and sick leave.
Example: The employee is sick for 1 days, reducing the total available hours to 32 (40 - 8). The remaining 4 days they record 28 billable hours. The billability is thus 87.5% (28 billable hours / 32 hours).
In the absence of a single, unambiguous calculation method, you cannot benchmark the billability of different subsidiaries and organisations. And this is the most frequently asked question we get from companies.
2 Billability can paint a false picture
Imagine your business sells a campaign based on 10 days’ work. Employee A works for 10 days on the project, meaning that their billability is 100%. But they do not finish the work within this timeframe, meaning that employee B needs to step in to help. They work for 2 days on the project. Their billability for the project is 0%, as the 10 billable days have already been assigned to employee A. Even though they have brought the project to a successful conclusion.
The opposite can also be the case. Imagine that an employee finished the job in 8 days instead of 10. Their billability is 100%. But what about those two extra days? Are these not assigned to anyone? Is there no record that, thanks to the employee, there are 2 days of additional margin? Billability does not solve these conundrums.
So billable hours are not always correctly assigned. Employees who step into the breach can wind up with a low billability. The opposite is also true: employees are not always recognised for the added value they have generated. This can lead to incorrect evaluations of employees, projects and clients – and thus demotivate your staff.
3 Billability says nothing about your profits
Imagine that you charge 6,000 euros for the project based on 10 days’ work. An employee works on this for 10 days and therefore records 100% billable hours. An unlikely, but ideal scenario. However the employee is in a senior role and costs the organisation 600 euros per day. The result: the billability is 100%, but the margin for your business is 0%.
Or you allow a junior, who costs 300 euros a day, to work on this project for 12 days. You have a good margin (2,400 euros), but the billability is lower (83%).
Billability is not an effective way of charting your margins and revenues. It only tells you how many billable hours you have worked.
In a nutshell
Information about and insights into billability are often contradictory. Moreover, a number of blind spots remain: billability can paint a false picture of your staff, and says nothing about your company’s margins or profits. Only evaluating on the basis of billability can therefore cause serious damage to your business.
The pathway to valuable KPIs for growth
In our e-book we introduce 2 KPIs that will give you an insight into your efficiency: ‘average profit per hour’ and ‘performance’, including extensive calculation examples and explanations of which insights you can derive from the figures. Download it here.
Subscribe to our Newsletter!
Want to learn more about Teamleader and stay ahead with everything that's new?