Revenue-generating activities are vital for a business to survive. It is therefore understandable that billable hours should be the focus for many organizations that track time. But how you spend your non-billable time is just as important, and tracking non-billable hours can reveal insights that unlock both tactical and strategic benefits.
In addition to quick wins in terms of greater efficiency, non-billable time-tracking support long-term business success by enabling the careful planning of growth initiatives, and the measurement of progress towards these goals, both at a business and individual resource level.
There is a natural tendency to focus on billable hours or ‘actual project work’ since it is necessary (and sufficient) to bill clients and get paid. In this article, we will explain why tracking the other side of the equation is just as valuable.
In order to grow, the business must bill more hours, and defend or increase the hourly rate. But achieving these things is largely possible due to non-billable activities, such as business development, training, and recruitment.
Billable and non-billable time are, therefore, two sides of the same coin when it comes to ensuring business success.
Distinguishing between the hours that you can and cannot bill to clients is simple in most cases.
An internal meeting to discuss the upcoming office Christmas party is clearly a non-billable activity, whereas time spent preparing a report for an important project milestone is obviously billable.
In cases where it is not obvious, and some thought is required, it is possible to apply common sense by looking at the matter from two perspectives:
One can group non-billable work into three clusters: Running the Firm, Growing the Firm, and Client Management. Here are some examples of common activities in each cluster:
Running the Firm
Growing the Firm
Client Management
There are some activities where the rule of thumb doesn’t work. Naturally, these corner cases are typically in the ‘Client Management’ category, and so on the borderline between client work and overhead activity.
Here are some further explanations:
The above list is not exhaustive, but should serve to illustrate the importance of anticipating such cases and making explicit provisions in the project proposal and contract. This means that any debate happens before the fact, and not in the heat of the moment.
For example, a client may disagree that travel time should be billed at a full rate, and propose a compromise that travel time is billed at 50%. This would mean that the contractor is not left completely out of pocket, and more importantly, that relationship is not jeopardized later on with an argument over the bill.
While distinguishing between billable and nonbillable time clearly has value, it may not be obvious why detailed tracking of non-billable hours is important. There are many ways in which it can not only help projects run smoother, but also benefit the business overall.
As we saw above, ‘Client Management’ is a category that covers tasks that are done for the client but cannot be billed as part of the project work.
Some things should never be invoiced (imagine sending a client a bill for taking them out to a football game). But others - such as impromptu progress updates given at the client’s request - are de facto project work, and furthermore outside the control of the project manager.
In such a situation, thorough time-tracking makes the following helpful analysis possible:
The project manager in this instance could conclude:
If there is a good business reason for maintaining the status quo, the contractor could include a “non-billable time” section on the invoice, showing the additional 25 hours while making it clear that the client is not being charged for them.
If on the other hand, the project manager feels the status quo is not sustainable, the next step could be to:
By understanding what is going on outside the official billable activity, it is possible to protect the economics of the project while ensuring the client gets what they need.
Following on from the previous point, the ability to scrutinize your non-billable time is likely to uncover “hidden billability” (i.e. genuine billable work that would not cause controversy if billed) that might otherwise fall through the cracks.
A study by Accelo found that around $50,000 is being lost annually per professional worker on answering emails alone. Overall 38%of potential billable revenue is being lost overall thanks to untracked time spent on emails, meetings, and delays in filling in timesheets.
It is only when non-billable time is tracked in detail that this hidden billability can be identified and billed.
The ‘Running the Firm’ category of activities consists largely of routine, unexciting tasks such as office management and compliance. It is unsurprising that they receive less attention than higher-profile activities that generate revenue.
But this is illogical if we remember that the business is a holistic entity.
The more efficient a firm’s processes, the more time there will be for billable work, and the more headspace can be devoted to it.
Financial advisor Mark Berg gives the example of a resource at his firm with a billing rate of $300-600 per hour, whose timesheet revealed that she was spending a lot of time on technology.
Assuming 30 hours, outsourcing this work to a tech consultant at $65 per hour would create a net revenue boost of $7-14k per year. And that’s just one change with one resource.
Targeting, prioritizing, and achieving efficiencies like these with automation and outsourcing solutions is highly lucrative, but only possible with a detailed understanding of the nature and extent of the various opportunities.
Of all the advantages, this is potentially the most important.
While your billing practices may be key to your revenues this month, and your processes to your profitability this year, your long-term future depends on the ability to develop and implement your growth strategy and growth initiatives.
This activity - strategic planning, recruiting, training, marketing, and networking - must all be achieved in the narrow window between pure admin and activities relating to existing clients.
You can predict with a decent amount of accuracy based on past data how much time you will have for these initiatives, and how much time you should devote to each. By tracking them, you can also gauge how much you have (or have not) met your targeted allocation of effort.
And because everyone is tracking their time, you can plan not only at the initiative level (e.g. Marketing, Recruitment) but also at the individual level. Each staff member can be judged for their holistic contribution to the business, not just a single headline number such as billability.
The illustrative analysis above reveals that while the firm is on track to meet its target time allocation for Recruitment and Training efforts, Admin has stolen 50 hours from Business Development. This would provoke a discussion as to why, and also how the problem could be solved.
The individual on the right whose time is being analyzed is broadly in line with her Training and Admin objectives, but has been spending too much time on Recruitment at the expense of Business Development. Understanding why would enable a manager to help address the issue, whether it is due to the employee or an outside factor (e.g. a sudden influx of new candidates).
There is a reason that many firms track only billable hours with precision. It is easier!
Not only is the process easier (one can simply ignore all non-billable work) but it also carries with it less obligation to constantly analyze and review non-billable categories. Given that these categories are as insightful as billable ones, you more than double your work as an overseer.
As should be clear by now, however, the effort involved in tracking, analyzing, and revising non-billable activity is an investment and not an additional cost, and the potential returns are not only substantial, but also impact every aspect of the business.
If you want to realize the above benefits, your first step is to establish a meaningful set of non-billable categories. We recommend the following steps (based on a methodology proposed by Berg & Jackson):
As already pointed out, you are definitely creating more work for yourself when you go down the path of comprehensive time-tracking. The consolation is that you are merely forcing yourself to do work that should be done anyway as part of successful business management.
You cannot afford to have billable work crowd out non-billable activity, nor vice versa. So where is the ideal balance between the two?
There are some general rules that apply in most businesses. For example, vacation, sick days, and public holidays will normally account for 6-8% of available time. Mandatory admin and overhead activities typically add another 10%, leaving the basic availability of a resource at a little over 1600 hours per year.
If everyone is billing 1600 hours (80% billability), there will be no time to grow the business or develop the staff, nor any capacity for additional client demands. Low billability, however, is dangerous as profit declines steeply in the presence of fixed costs.
Hence, 60-80% is seen as a good range to aim for the firm overall. As the firm grows and develops specialization and management layers, this will vary across resources.
Senior management, being more concerned with non-billable Grow/Manage the Firm activities, as well as Client Management tasks, will obviously have a lower billability target. And of course, support staff may not have a billability target at all.
The beauty of a time-based revenue structure is that it enables you to experiment with different assumptions on billability in Excel at the beginning of the year. You can see whether your billability is too high or too low. And by tracking non-billable time, you can understand why.
Many firms fail to grow because the founders are overwhelmed with the day-to-day admin. We suspect this is because they have fallen into the trap of concentrating on the core work and have hence lost sight of the wood for the trees.
We would go so far as to say that the majority of the value of time-tracking, from a business management perspective, could be lost if no attention is paid to how employees spend their day when they are not generating revenue.
Even if you are skeptical, going through the exercise of creating the categories is an interesting one, and will likely stimulate some helpful discussion about ways to improve efficiency. Why not give it a try?
