Building a profitable firm should be a priority for all leaders, irrespective of the size…
In the quest to understand performance and boost profitability, most businesses continually measure a ton of different metrics, ranging from customer satisfaction and employee engagement, to lead generation, marketing conversions and sales indicators. But perhaps the most universal metric for any business Utilization Rate.
If you don’t understand your utilization rate, you can’t understand your efficiency and productivity – which means you can’t begin to evaluate the profitability of your business. That’s why a multitude of businesses, from creative agencies and professional services through to law firms and independent consultants, closely monitor their utilization rate.
According to the 2021 Clio Trends Report, your firm’s utilization rate allows you to measure your firm’s workload and productivity. It’s one of the most important KPI your law firm should follow.
What is utilization rate?
Simply put, utilization rate is the percentage of a person’s total working hours that are spent on work that can be billed to a client. No matter how motivated or productive an employee is, no matter how determined they are to do the absolute maximum, time will always be their limiting factor. There are only 24 hours in the day – and as we’ve explored in depth before, human beings don’t do well when we strive towards being “always on”.
While an employee may work 40 hours a week, it’s pretty much impossible to do 40 hours of billable work. Meetings, lunch breaks, phone calls, training and business development all eat into it. But when it comes to utilization rate, it’s important to get the balance right: if it’s too high, your business may be cutting corners with essential internal work and you probably need more resources; if it’s too low, you may not bringing in enough work for your head count.
Why should you monitor utilization rate?
There are several reasons why it’s so important to monitor utilization rate. Any company that bills by the hour – whether that’s an agency or a law firm – needs to know whether they’re billing enough to cover their costs plus overhead. If you have a healthy utilization rate, you’ll know you’re billing efficiently. Plus, once you’ve figured out your ideal utilization rate, you can then use it to help understand many other important business functions.
Utilization rates are especially important when it comes to resource management, and can significantly improve forecasting and resource optimization. As a company grows and teams expand, the importance of having visibility into your future becomes even more vital – and your utilization rate can let you know whether you have the capacity to take on a new client, whether you need to hire more people, if you’re spending enough time on client work and whether you should invest more in internal projects.
How do you calculate utilization rate.
Knowing how to calculate utilization rates is critical for law firms. When you know how to calculate utilization rate for your law firm, that knowledge can provide insight into your firm’s billing efficiency. While knowing how to calculate utilization rate is important, you should also keep in mind these other key law firm KPIs:
Utilization rate: As stated above, the utilization rate measures workload and productivity. You can calculate the utilization rate by dividing billable hours worked by the number of hours worked in a day.
Realization rate: This measures the potential value of work performed. You can determine your law firm’s realization rate by dividing the number of billable hours invoiced by the number of hours worked.
Collection rate: This rate measures the ability to capitalize on work performed. You can determine this by dividing the number of hours collected by the number of hours invoiced.