Professional services companies obsess about utilization. Having highly skilled consultants on the bench (or on the beach as we used to say at Monitor) is expensive. The standard view is that people not being billed to clients are dragging down the economics of the firm.

Yes there is some lip service to investments in training. But in fact most training takes place on the consultant's own time even if it is partially subsidized by the firm. The best firms also set aside some time for capability building. These are the general capabilities that allow a firm to do its work better than its competitors and that drive differentiation. (In today's world capabilities generally include access to data and the ability to execute on data analysis and visualization.) But in the end, it is people billed to clients that drive the profitability of professional services firms.

Most firms must maintain utilization ratios of more than 70% to survive and more than 80% to thrive. Once utilization rates get up over 90% the firm is probably running too hot and not giving people time to grow their own skills or for the her companies cannot match, a firm that is investing in software and data to make its consultants more effective, a typical consulting firm and an underperforming firm.

One can see why the leadership of professional services firms care so much about utilization. Note that the differentiated fir and the research-driven firm can both afford to pay consultants more while maintaining profitability. As talent markets tighten this is an important strategic advantage.

We worked with a client to develop a model for how Ibbaka Talent can impact utilization rates.

The lower the current utilization rate the greater the impact, but even a firm with a high level of utilization can benefit a great deal from Ibbaka Talent.

How does skill and expertise management impact utilization?

Skill and expertise management shifts allocation and resource management from a focus on availability to a focus on skills. Too many firms use availability as the main method for assigning people to teams. If a person is available, or coming available, then they get assigned to a project (the other default mechanism for resource allocation in firm's without skill and expertise management is relationships - you want to get on a project, you need to know someone connected to the project).

The availability approach actually sub optimizes for utilization! It also tends to result in project teams that lack the right skills and team coherence. Why is this?

1. A person 'on the bench' with critical skills for a project can easily be found and assigned.

2. Resource allocation can be rebalanced based on the available skills and project needs. This is impossible without insight to skills and availability.

3. Combinations of people with complementary skills can be assigned to teams. The right combinations can make it possible to reduce the number of people on teams, freeing up talent for other teams. On analysis, many teams have a combination of skill gaps and overskilling. This misallocation of people to project teams is inefficient and drives down utilization over time.

Lack of skills and expertise management can come at a significant cost

The actual situation is worse than this. Lack of skill and expertise management often causes companies to hire or contract in people to cover skill gaps when in fact the skill is present within the organization. This can be a significant cost. This begins to happen frequently in companies with distributed teams, or more than 100 consultants, or when there has been a recent acquisition. It is also true of companies with a lot of differentiation and specialized skills.If everyone in a company has the same limited set of skills and if all the projects are similar (commoditized) then skill and expertise management is less important. These tend to be the companies with lower profit ratios, no matter how high they drive utilization, and who are at the most risk from machine learning and business automation.

Like this post? See other ways to measure skill management ROI

• Part 1: win more work

• Part 3: increase employee engagement

Without a skill and expertise management system your firm will not be able to compete long term. You will have lower utilization (and lower profit) and less differentiation. There is more to the story. Skill and expertise management also contributes to employee engagement and retention. That will be the theme for next week. The ROI on Skill and Expertise Management Part 3: Engagement.