Common Pitfalls in Billable Hours for Professional Services and How to Avoid Them
There is a change happening in the professional services landscape. It is becoming harder to recruit and retain employees. The globalization of the marketplace has increased competition for clients and clients are demanding more for less. Professional services organization (PSO) management has become focused on short-term firefighting instead of working on a long-term strategy. Thomas J. DeLong, Senior Fellow at Harvard Business School, said, “In the past, the work of [PSOs] was a gentleman’s game — and now it’s a blood sport.” Firms are increasingly focusing their efforts on bidding optimization and cost-saving measures instead of looking for long-term profitability.
One of the areas overlooked as a result is the billable hours, which is a major pain point for many professional services organizations.
Top Billable Hours Mistakes
Billable hours are used to calculate utilization rates, which are an excellent indicator of productivity and revenue. Improving utilization rates directly impacts the bottom line. To improve utilization rates, organizations must focus on capturing all billable hours. However, PSOs end up wasting those billable hours on non-billable work, such as administrative tasks. Faulty timekeeping and project overruns also reduce overall billable hours. While some billable hours must be sacrificed for essential business functions, such as admin work, planning, R&D, etc., there are some other pitfalls to be aware of.
Here are some of the common challenges around billable hours that all professional services firms experience.
Spending Too Much Time on Admin Tasks
Filling up and submitting timesheets is an unavoidable administrative task, but it also happens to be tedious and time-intensive. This is particularly true if the timesheet population is performed manually. Considering the tedious nature of this task, it is not uncommon for employees to fill up timesheets at the last minute, resulting in quite a few hidden costs and potential errors. Employees may even need to shift through multiple files and documents to determine the time spent on different tasks. This is time that they could have spent on billable work instead.
Complicated Time Tracking Process
Unless you have a time tracking system, such as Replicon, that is both efficient and easy to use, errors are bound to happen. As a result, timesheets will not reflect the correct time spent on tasks and projects, resulting in reduced billable hours. Employees must be empowered to record time spent in real time. If filling up timesheets is complex or if they record hours later, there is a risk of errors. Some employees may even forget to account for all time spent on different tasks. If this is a regular issue, it can prove to be a massive liability for the bottom line of the company.
Failure to Meet Billable Potential
In the professional services industry, employees can make or break a company. Simply having good employees is not enough. You need highly skilled employees who can generate revenue to offset their costs. However, to do so effectively, these employees need to know their billable potential. Employees need to have an accurate understanding of how they are spending their time and how much of that time spent can be billed. Without this information, it becomes difficult for them to reach their billable potential and maximize utilization rates.
Not Tracking All Time
For PSOs, tracking time should be as important as tracking money. Knowing where every minute is being spent allows organizations to make correct decisions to increase billable hours, no matter which billing models are used. Take, for instance, the following billing models:
- Fixed Price: While the costs are fixed, the organization still needs to track time to ensure that the work is being completed within given time parameters to stay within the costs specified.
- Daily/Hourly Rate: As its name suggests, time must be tracked when using this model for billing the client accurately.
- Time & Materials: These contracts cover the cost of materials and overheads, in addition to labor costs. Of course, the labor costs will be affected by the time spent on the work by the resources, making time tracking essential.
Apart from these, there is a common issue plaguing most services firms. Often highly skilled resources are allocated low-effort, non-billable tasks due to a lack of visibility into time. By monitoring even non-billable time, managers can understand which tasks can be reallocated to employees with a lower cost to the company or even outsourced.
Inefficient Approval Process
It isn’t ideal to let employees fill up timesheets without oversight due to risks of capturing incorrect time data. For this reason, organizations require managers and supervisors to verify and approve timesheets before they are sent for billing or payroll calculations. However, most PSOs fail at simplifying this process, leading to several issues. Supervisors might end up taking more time to approve timesheets, leading to delays and bottlenecks in billing calculations. Moreover, if supervisors try to approve timesheets days after they have been submitted, it can be harder to track down the documentation and ensure accuracy of the data.
Billing Hours Best Practices
Thankfully, there are several ways to combat the above-mentioned issues and improve your billing and utilization rates. Here are some best practices that you can implement.
Implement Automated Timekeeping Software
To optimize the utilization rates of your employees, the first step should be to get rid of clunky and inefficient time tracking processes. It is essential to have a system that allows employees to access and fill up timesheets easily and quickly. Employees should find it easy to add information on assigned tasks and allocate the correct amount of time spent. It will also help if you get a system that automatically pre-populates timesheets based on configurable rules to streamline timesheet completion and submission. Our time tracking software at Replicon has easy-to-use timesheets that are customizable and can be prefilled to automate some of the reporting process.
Empower Employees with Utilization Rates
Studies show that utilization rates are directly correlated with the profitability of a professional services organization. Average utilization rates do vary among different professional services verticals. For IT services, it is 81 percent, while legal and strategy consulting services have a rate of around 75 percent. Irrespective of the actual percentage, it has been determined that firms with higher utilization rates are generally more cost-efficient and profitable.
Therefore, it is essential to know the overall utilization rates as well as the individual rates for each employee. More importantly, this information should be available to all instead of solely the leadership. Employees are more likely to deliver once they know their utilization rates, leading to an increase in the organization’s billable hours.
Leverage Mobile Timesheets
To ensure accurate time tracking, employees should be able to fill up timesheets in real time. This can be a challenge for remote and field-based employees who might be forced to return to the office before submitting timesheets. This can be prevented by employing mobile time tracking systems, such as Replicon’s mobile timesheets, that can capture time anytime and anywhere, irrespective of connectivity. This ensures that calculations around billable hours can proceed correctly and smoothly without delays.
Adopt Cloud-based Time Tracking System
Paper and spreadsheet-based forms of time tracking no longer pass muster in the modern workplace. Time tracking must be flexible and easily accessible, which is why PSOs should invest in a cloud-based time tracking system. Replicon’s platform allows easy submissions irrespective of locations, ensuring that supervisors and billing managers get access to the latest data on billable time.
Replicon’s platform offers features such as configurable time tracking, ability to track billable and non-billable hours, advanced validation rules, and intelligent approvals to drive accurate time tracking for billing activities. Replicon also provides robust billing capabilities that leverage the time data to drive your firm’s billing process with support for actuals vs. budget tracking, project estimation, multi-level client management, and real-time project tracking.
Ultimately, best practices around billable hours, project visibility, and project planning are all related closely. By emphasizing time tracking and increasing accessibility to real-time and historical data, PSOs can improve their business processes, resulting in increased resource utilization and productivity.
View our webinar to learn more about how our cloud-based, mobile time tracking suite can resolve your billable hours mistakes and lead to an empowered workforce.