In the last post we talked about the definition of the utilization rate, how to calculate utilization rate, and the utilization rate you should aim for. We now want to take a look at how this will affect your head count strategy, and some challenges with it. But first let’s look at the utilization rate formula and some graphs.
What Is Utilization Rate and Why It Matters
The utilization rate meaning can vary depending on the type of business, but in consulting, it reflects how many billable hours are being used compared to total available hours. When your team operates at an optimal utilization rate, it means you’re balancing workload, profitability, and employee well-being. Too high, and burnout looms; too low, and your margins suffer.
Understanding the Utilization Rate Formula
Suppose that our consulting business is getting new projects at the landing rate of L per month. And it takes on average M months to complete the work. We can define the finishing rate as F = 1/M; so if we take M = 2 months to finish a project then the finishing rate F = 1 / 2 months = 0.5 projects / month. And finally, let c be the number of consultants available to work on a project, one consultant per project. We also assume that we have very accommodating customers in that they are willing to wait forever if necessary to have their projects worked on by your organization. Great work to have such amazing customer loyalty! In this case, your utilization will equal where r – L/F.
Utilization = r/c
Intuitively, r is the rate at which we get new work relative to the speed at which we complete old work. To increase L we need to increase our business development efforts. Now F is how fast we execute on the project: Assuming that is relatively fixed in the short run, then the only lever we have to control utilization rate is our head count, or more specifically the total number of hours available, with part timers available for less hours than full timers.
How to Calculate Utilization Rate
To better understand how to calculate utilization rate, imagine your consulting team works a total of 160 hours in a month, and 120 of those hours are billable. The utilization rate formula would then be (120 ÷ 160) × 100 = 75%. This percentage shows how much of your team’s time is directly generating revenue. It’s a simple calculation, but one that reveals powerful insights into productivity and financial performance. To learn more about billable hours and how to calculate them visit our resource guide.
But the trouble is the average number of projects queued up is:
r/(1-r) + C(c, r)
Where C(c, r) is some nasty formula that you should avoid if possible due to complexities. The key here as r increases, so does the backlog.
Balancing Billable Hours and Team Stress
When analyzing your utilization rate, it’s critical to remember that higher isn’t always better. A 100% utilization rate may look good on paper, but it leaves no room for internal development, admin tasks, or professional growth. Understanding the utilization rate helps leaders design smarter schedules that prevent bottlenecks and reduce stress levels across teams.
If you would like to discuss how to model your organization and optimize your organization’s size based on your type of projects, contact us on the contact page for a free, no obligation discussion.
Finding the Right Utilization Rate Target
However, we can plot it. On the graph below, you will see a plot of the utilization rate changed by the number of consultants between 1 and 10, and on the vertical axis the number of projects waiting to be worked on. Having four lines for different r = L/U values. As you can see, as the win rate approaches the service rate, the number of projects waiting in the wings increases dramatically! This is not good for your reputation. For this reason, we would advise moving the utilization target much above 80%.
For this reason, we suggest not pushing the utilization target much past 80%. According to the SPI Research Professional Services Maturity™ Benchmark Report, the most successful consulting firms usually stay between 75% and 82%. That range keeps teams productive but not overloaded, helping prevent burnout while still meeting client demand.
The sweet spot for most professional service organizations tends to hover around an 80% utilization rate. This allows teams to stay productive without overloading their schedules, ensuring projects move efficiently while maintaining quality and morale.
Discuss Your Utilization Model with an Expert
We want to maintain a head count that keeps the number of waiting projects low, but keeps our team busy most of the time.
If you would like to discuss how to model your organization and optimize your organization’s size based on your type of projects, contact us today for a free discussion.