In two of my previous posts I’ve looked at two essential measurements for a professional services organisation. The first was utilisation – if your staff aren’t busy then there’s a danger that your revenue isn’t going to cover your costs. The second was standard fee variance – if you don’t hit your target fee rates then you’re going to be less profitable than you planned. Sometimes there’s a temptation to reduce your fee rates to sell more time. Utilisation might rise, but so will your variance from standard fees. One measurement is never enough. And if you’re only using utilisation when calculating bonuses, you’ll see standard fee variance rise or another measurement that’s equally important – realisation.
Realisation is a measure of how much project/engagement time can actually be converted to revenue through billing. There are many reasons why you might not be able to bill all the time your staff spend on projects:
You may have placed some trainees on the project, fully intending only to bill some of their time.
You may have made mistakes that you can’t charge your client for.
You may decide that some of the time is ‘account management’ time that can’t be charged.
You may decide that your staff have worked too slowly and that you can’t reasonably charge all their time.
You may have agreed a fixed price for a task or project, based on an estimate which you have now exceeded.
And there are many more reasons.
The end result is that, for one reason or another, you can’t bill the entire value of the time that’s accumulated on a project.
Realisation, usually expressed as a percentage, is the proportion of value that you can bill. It may be more than 100% if you’ve delivered a fixed price project in fewer days than estimated, but more often it is less than 100%. If you can calculate this percentage by client, by project, by business stream, by team, even by employee, then you’ve got some vital intelligence that can help you control risks to profitability.