Time is money and as an agency you can’t afford to waste either. In this fast-paced world where time directly translates to revenue, agencies need to be mindful and ensure they're getting the most out of their team's time and maximise their billable hours.
Many agencies struggle with hidden inefficiencies of wasted time and uncollected payments. Here's where utilisation and recovery rates come in, they are powerful metrics that shed light on these issues and are crucial for understanding how efficiently your agency is functioning.
In this blog we will cover:
Before we dive into improving utilisation and recovery rates, we need to take a look what are billable and non-billable hours.
Billable hours ultimately generate revenue for your agency. These are the potential hours that could be billed to a client, your agency will utilise these hours to work on a client’s project or accounts.
Non-billable hours are essential to the day to day running of an agency, these hours are not directly chargeable to clients but are fundamental to your team’s performance. Non-billable can include:
Utilisation rate measures how efficiently employees or resources are being utilised within a certain time frame. This is typically calculated as a percentage of time your team spends on billable activities or productive time compared to their total hours, they have available.
For example, if your team works 40 hours a week. 20 hours are spent on client projects (billable hours), while the remaining 20 hours go towards meetings, internal projects, or non-chargeable tasks (non-billable hours). In this case, your utilisation rate would be 50% (20 billable hours / 40 total hours).
Recovery rate focuses on the portion of billable hours that actually get converted into client invoices.
Now let's say you invoiced your client for those 20 billable hours, but due to client revisions, scope creep, or late payments, you only receive payment for 16 hours. Your recovery rate would be 80% (16 collected hours / 20 billed hours).
To find your agency’s utilisation or a project’s recovery rate use the following calculations to find the percentage. Using the example above this is how we can find the percentage:
Utilisation Rate = (Billable Hours / Total Work Hours) x 100
Using this calculation with the above example you can see the utilisation rate is 50%, meaning the team use 50% of their time on non-billable (admin tasks) and 50% on client work.
Utilisation Rate = (20 billable hours / 40 total hours) x 100 = 50%
Recovery Rate = (Collected Revenue / Billed Hours) x 100
Again, based on the above example, the team billed the client for those 20 billable hours, but they only receive payment for 16 hours due to client revisions, scope creep, discounting or late payments. This results with a recovery rate of 80% meaning 20% is lost time and revenue.
Recovery Rate = (16 collected hours / 20 billed hours) x 100 = 80%
A good rule of thumb for an agency team would be an 80/20 split for both utilisation and recovery rate. For utilisation rate it is usually, 80% spent on billable time and 20% for non-billable. While a recovery rate of 80% billed and 20% lost dues to client and project discrepancies is a good benchmark.
Bear in mind that this ratio might not work or apply to senior members or c-suite executives of an agency as much more of their time is spent on non-billable, agency work rather than client related work.
Recovery rates can vary significantly depending on the agency's industry and project type. For example, a project-based agency might have a higher recovery rate (closer to 80%) compared to an agency with ongoing retainer clients (where recovery might be more consistent).
Ideally your recovery rate should be nearer 100% if you have accurately estimated the job. Realistically it will be lower, however if it is significantly lower than 80% this indicates potential issues. This is why it’s vital to have a good understanding of what your agency’s utilisation and recovery rates are.
Ultimately, utilisation and recovery rates impact your bottom line and should be metrics that are tracked. If your teams non-billable time eats into their billable time or if your fail to correctly estimate the amount of billable hours needed to complete the project then this hits your profit margins.
Here are a few more reasons why tracking utilisation and recovery rate can help with your agencies performance:
Are things taking longer than expected? Do mistakes keep reoccurring which then adds on additional time? If this is the case then your utilisation and recovery rates can act like a diagnostic tool, revealing where billable hours are being lost. Are team members bogged down by administrative tasks? Are meetings excessive or unproductive? By analysing utilisation data, you can identify areas for streamlining workflows, delegate tasks more effectively, and free up valuable time for billable activities.
Staffing decisions are critical for any agency. Utilisation rates provide valuable insights into your team's capacity. Can your current team handle the workload effectively, or are you overstretching resources? This data allows you to make informed decisions about staffing needs, project allocation, and even potential hiring requirements to ensure your team is neither overloaded nor underutilised.
Keeping an eye on your recovery rates can help you identify clients who might be draining your time, money and resources. If you see a low recovery rate it could lead to a troublesome client or broken process or lack of resources. Once identified you can take steps to improve communication, manage expectations, and ultimately, protect your valuable time and resources.
While there's no one-size-fits-all benchmark, utilisation and recovery rates can provide valuable insights into how your agency stacks up against industry averages. This can be a helpful starting point when it comes to calculating or improving these rates.
While they don't guarantee future success, utilisation and recovery rates do provide invaluable insights into the agency's current financial health and its potential for profitability.
Tracking both provides a holistic view of your agency's time-to-revenue conversion, allowing you to forecast growth and price on-going client work realistically.
Utilisation and recovery rates are powerful tools for agencies to optimise their operations and achieve financial success. By tracking and analysing these metrics, you can ensure your team's valuable time translates into revenue, leading to a healthy and sustainable agency. Once you have identified and tracked your utilisation and recovery rates, now is the time to improve them.
