Utilization or Demotivation? The Hidden Cost Consultancies Pay When Chasing Billable Hours

“At the big firms you get moved around like a chess piece on a board” – this quote from FT’s article stood out to me and made me think of the many consultancies I’ve audited over the years.

Last year, I started working with a mid-sized, owner-led technology consultancy (+/- 50 consultants on the payroll). In my first workshop with them – with all due respect – the only thing the 3 partners talked about was utilization and ‘selling project hours’. 

It shakes me to my core. Why? 

Because the utilization metric is often used as THE yardstick to measure the health, efficiency, and growth potential of a consultancy. And that’s wrong. Especially in a 50-person consultancy in a pretty narrow expertise domain. 

In the case of a big consulting firm, with hundreds of people, I can understand the use of the utilization metric to measure productivity and manage the billable hours. I get that. 

But in a boutique consulting firm (the kind of firm I advise), I always recommend being (very) cautious. I am a cold lover of utilization. Really. 

More to growth than billable hours

This situation is not unique – I see it over and over again in the consulting world. It’s questions like: How many billable hours did the firm deliver this month/quarter/year? What’s the biggest client in terms of billable hours? What’s the minimum number of billable hours required to take on a project?

While focusing on utilization can be helpful in keeping headcount in control and maximizing revenue and productivity, it shouldn't be the only strategy in the quest for revenue growth for the mid-sized consultancy.

Utilization alone won't necessarily address the underlying need for a shift in the consulting business model or the delivery of value to clients. This is what I’ll be discussing in this article.

Dropping utilization?

I’m not arguing that consultancies should drop utilization measurement altogether – it still provides valuable insights into resource allocation, efficiency, and productivity. 

However, it's important for consultancies to recognize that utilization is just one piece of the puzzle and not the sole determinant of success.

Instead of focusing solely on utilization, moving people around like a chess piece on a board, consultancies should consider adopting a more balanced approach that includes multiple key performance indicators (KPIs) to evaluate their business. 

By incorporating other KPIs like gross margins, average revenue per FTE, post-project client satisfaction, project outcomes, and value delivered, consultancies can gain a more comprehensive understanding of their performance and overall impact.

Furthermore, when developing growth strategies, consulting leaders should first rethink their business model, look into innovative pricing strategies, and think about how they can deliver comprehensive solutions that create lasting partnerships with clients. 

By doing so, consultancies can achieve non-linear growth without solely relying on utilization, allowing them to stay competitive and grow sustainably in the long run.

It's time to confront the uncomfortable truth: the linear consulting growth model, where revenue is directly proportional to headcount, has become an unsustainable relic for mid-sized consultancies. In a world where top-tier talent is scarce, and the competition is fierce, relying solely on adding more consultants to the payroll to boost revenue is a one-way ticket to stagnation and poor profit.

The dark side of utilization

Excessively focusing on utilization can be demotivating for consultants as it can create a high-pressure environment that prioritizes billable hours above all else. This can lead to several negative consequences:

1. Burnout: Constantly chasing higher utilization rates can result in overworked consultants, leading to burnout, decreased job satisfaction, and ultimately, higher employee turnover.
   
   
2. Reduced quality of work: When consultants feel pressured to maximize billable hours, they may sacrifice the quality of their work or rush through projects, potentially compromising client satisfaction and long-term relationships.
   
   
3. Stifled innovation and professional development: A utilization obsession can limit the time and resources available for consultants to engage in continuous learning, skill development, and innovative thinking, which are essential for staying competitive in the industry.
   
   
4. Negative work culture: A relentless focus on utilization can foster a toxic work culture, where consultants are treated as mere resources rather than valued team members, leading to decreased morale and engagement.

By considering a range of KPIs (here’s a full list of KPIs I’ve published) that emphasize not only efficiency and profitability but also employee well-being, client satisfaction, and project outcomes, firms can foster a more supportive and collaborative culture that ultimately drives long-term success.

Recommended reading: (Case Study) Replicate the Secret of This Highly Profitable Consultancy

A short case study, focusing on Revenue/FTE and Gross Margin

Let me get back now to the 50-person consultancy from the introduction of the article. The starting point of our collaboration was their intention to deepen their advisory specialization in a high-in-demand technology and improve their positioning in the market. 

It quickly became obvious for them that their obsessive focus on utilization in this stage of their maturity didn’t really make sense. 

Why not? Well, the specialized service offering wasn’t really mature yet. A team of about 10 consultants was involved in piloting a new approach at 3 existing clients with the objective to standardize the delivery process and the projected outcomes of the work. 

An alternative approach and measurement

For the new service, we jointly decided to adopt a more holistic approach to evaluating the performance of the consultancy firm, f​ocusing on 1) growing revenue per FTE (Full-Time Equivalent) and improving the gross margin instead of relying too much on utilization in the early stages of the new service. 

This alternative approach takes into consideration both the efficiency and the profitability of the organization, which is crucial for sustainable financial health.

1. Growing revenue per FTE encouraged the consultancy to find ways to increase the value delivered by each team member. This involves upskilling the broader team in the new service, and increasing the investments in new delivery systems and processes. The end result is a more effective team that can deliver better and faster results for clients without necessarily increasing headcount.
   
   
2. Improving the gross margin ensures that consultancies are not only generating more revenue but also retaining a higher percentage of it as profit. This focus on profitability can drive firms to adopt innovative pricing models, streamline their cost structure, and create more valuable offerings for clients. As I always say: ‘The gross margin says it all - it’s the reflection of how effectively and efficiently a consultancy is managed.

By adopting this alternative approach, I’ve experienced that boutique consultancies can build a more sustainable and competitive business model, a solid foundation for long-term success.

There are dozens, if not hundreds, of KPIs that can indicate how well or poorly their firms are performing. However, without a solid foundation for measuring the core activities, processes, and project organization, trying to fix the problems will be fruitless.

Recommended reading: Why 'Hiring to Scale' Is a Losing Battle for Mid-sized Consultancies

In conclusion

Utilization or demotivation? The never-ending quest for billable hours can take a heavy toll on the consulting industry, creating an unhealthy, high-pressure, even toxic environment that threatens the motivation and well-being of the team. 

In an era of labor shortages, the relentless focus on billable hours and time sheeting is not only keeping consultancies away from embracing non-linear growth thinking, but it's also undermining their ability to thrive in a competitive landscape. 

For boutique consultancies, I’ve gathered great experiences with an alternative focus on growing the revenue per FTE and constantly improving the gross margin. 

By optimizing revenue generation per employee and maximizing gross margin, the consultancy can enhance profitability and overall financial health. 

This approach aligns with a goal of improving operational efficiency, pricing strategies, cost management, and delivering higher-value services. It is a viable alternative to an exclusive focus on utilization and can contribute to the sustainable growth and success of the consultancy.

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