WhyYouShouldUseActualAvailableBusinessHoursWhenCalculatingUtilizationDoyouremembera‘proof’aboutwhythereisreallynoavailabletimetogotoschool?The‘proof’piledassumptionontopofassumptioninacleverbitofdoublecountingandmisdirectiontoconvincetheeagerandgullibleyoungreaderthatafteraccountingforweekends,holidays,summerandsleep,therereallywasn’tanytimeleftovertogotoschool.

Whatdoesthathavetodowithprofessionalservicesfirms?Don’tunderorovervalueyourfirm’smonthlyorannualutilizationmetricbyusinganincorrectassumptionaboutthenumberhoursinamonthortheyear.

You’lloftenseefirmssettingtheirannualutilizationbaselinedenominatorat2,080hours(52weekstimes40hoursperweek),andthenassumingthateachmonthhas1/12thofthetotal,or173.33hourspermonth.Or,you’llseefirmssettheirutilizationbaselineat168oreven160hourspermonth(21daysor20daystimes8hours,respectively),regardlessofthemonth.

ButforprofessionalservicesfirmsthatrelyonRealizationandUtilizationtomakesenseoftheirfinancialsandwhetherornotprospectiveprojectsareprofitable,amorepreciseapproachisnecessary.

Let’sconsiderthecalendaryear2016,andassumeastandard8hourworkday:

Thereare366daysin2016–it’saleapyear–and10Federalholidays.Lessweekends,that’s252workdays.Twohundredfiftytwodaysateighthoursperdaymeans2,016hours.Alreadywe’relessthana2,080baselineamount.

Ifyourcompanyhasinternationaloffices,dependingonthecountry,thestandardworkdaymaybelessthan8hours,andtheremaybemorestatutoryholidays.Thatfurtherreducestheaccuracyandrelevanceofa2,080hourutilizationdenominator.

ManycompaniesalsoofferholidaysbeyondwhattheUSgovernmentoffers.Forexample,manycompaniestreatthedayafterThanksgivingasaholiday,andit’snotuncommonforcompaniestoofferemployeesanextrahalfdayonChristmasEveandNewYear’sEve.Dependingonthecompany,that’sanothertwodays.Sonowwe’redownfrom252to250days,andaneven2000hours.Makestheannualmatheasy,butdon’tforgetthosehoursarenotevenlydistributedthroughouttheyear:

Let’slookatMarch2016inmoredetail:MarchstartsonaTuesday,endsonaThursday,andstretchesacrossnearlyfivefullweeks.TherearenofederalholidaysinMarch,sothat’sawhopping23workdaymonth,or184hours.Ifyourfirmusesauniformmonthlyamountof168hourspermonth,astafferwhoworkseverydaywillendupwitha110%utilizationcalculation.Infact,usingthe168houruniformmonthlyassumption,thestaffercouldmisstwoentiredays,andstillendupwith100%utilization.

ManagersevaluatingMarchresultswouldcongratulatethemselvesonanoutstandingutilizationnumberbutit’snotaccuratebecausethedenominatorwaswronginthefirstplace.

Let’slookatadifferentexampleandseehowauniformmonthskewsutilizationintheoppositedirection:January2016.ThemonthstartsonaFridayandendsonaSunday.Thatwouldbe21workdays,or168hours.ButNewYear’sDayisaFederalholiday,andsoistheBirthdayofMartinLutherKingJr.onMonday,January18th.Sotherearereally19days,or152hoursinJanuary.Astafferthatworksall19availableworkdaysandhas152hourshasroughly90%utilizationusinga168houruniformmonth,butwasreally100%utilizedwhenyouconsiderthespecificmonth.

Sothelessonisthis:Yourutilizationreportingwillbemoreaccurateandutilizationcalculationstruertowhatactuallyoccurredifyourcalculationstakeintoaccountavailableworkinghoursbyspecificmonth.

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USCalendarYear2016250TotalWorkDaysbyMonth,assuming10Federalholidaysand2addiBonalCompanyHolidays