Are you Fat, Dumb & Happy?

Have you ever seen results like these?

                                               Year 1      Year 2      Year 3         Year 4

Profit % of Budget        105%        105%         100%          54%

Consultancies can move profits between accounting periods based on earned income judgements. They run the very real risk of becoming Fat, Dumb and Happy if they squirrel too much of their profits away for a rainy day.

How does this happen?

Let's run through a 4-year period using Ashbourne Advisory as the ‘Fat, Dumb & Happy’ Consultant

Year One Results: Big Surplus

In Year 1, we had a great year and decided that we only wanted to declare part of it – 105% of our target (which is where our bonuses maxed out). We kept the rest for a rainy day sitting in fat contingency pools in our biggest projects. So far all good.

                                               Year 1

Actual Available Profit           140

Budget Profit                          100

Declared Profit                       105

Surplus Profit in Projects        35

Cumulative Surplus                 35

Profit Percentage of Budget 105%

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Year Two Results: Another Cracking Year

In Year 2, based on last year’s good performance our budgets have increased. There is enough available profit in the market to meet budget and we pull some extra profit out of the project contingencies so we hit stretch. We look like heros for the second Year in a row.

                                                  Year 1      Year 2

Actual Available Profit                140          110

Budget Profit                               100          110

Declared Profit                            105          115

Surplus Profit in Projects            35             -5

Cumulative Surplus                    35             30

Profit Percentage of Budget     105%        105%

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Year Three Results: We Made Budget!

In Year Three we get a bigger profit target. However, the market has continued to deteriorate and the profits we make are insufficient to hit the budget. Not to be deterred (heros are brave), we reach deep into our project contingencies and draw out enough profit to hit our budgets.

We have not needed to make fundamental changes to our business – at this point we are:

- Fat with the previously earned Profits,

- Dumb  in the belief we are successfully managing the business without underlying changes, and

- Happy because we have found a ‘clever’ to stay heros (and get our bonuses)

                                             Year 1       Year 2      Year 3

Actual Available Profit          140          110            90

Budget Profit                         100          110           120

Declared Profit                      105          115           120

Surplus Profit in Projects      35            -5           -30

Cumulative Surplus               35            30            0

Profit % of Budget:                105%      105%    100%

Year Four: WTF?

In Year Four, our failure to act has come home to roost. We have a sharp and unavoidable drop to profit. We are asking ourselves how can the market have turned so quickly?

“Governments stopped spending ahead of the election”,

“ COVID”,

“woke corporate policy has distracted the business” – just some of the bad management excuses.

What we failed to spot, which should have been apparent in Year 2, is that the market had deteriorated. If we had seen this in Year 2,  we had enough time to adapt to new markets, pivot the workforce and arrest the trend.

The only management action likely in Year Four is mass redundancies to meet the work in hand. We were Fat, Dumb & Happy (and should be looking for new jobs)

                                        Year 1     Year 2     Year 3      Year 4

Actual Available Profit       140         110            90            70

Budget Profit                     100         110           120          130

Declared Profit                  105         115           120            70

Surplus Profit in Projects   35          -5            -30              0

Cumulative Surplus            35           30              0               0

Profit % of Budget            105%     105%        100%         54%

How do I avoid being Fat, Dumb & Happy?

It is essential to always recognise the underlying performance – I like to use the ‘3 levers model’ (explained in the next article). Be especially obsessive on overheads and utilisation – these levers you control.

Report transparently to your teams (up and down) on what is driving profit and is profits are different from underlying performance. It is often better to take the loss as they arise to force change in the business. Create the crisis or burning platform to create the change – see also the Article on “Never wasting a good crisis”.

Surely this never happens?

Ask any senior Manager whether they have seen this happen – you may be surprised how often it happens. You may get a response like “We were definitely Fat, Dumb and Happy” in 2014.

Stephen Uhr

February 2024

Authors Note: I was made aware of the FDH phenonium by Ivor Catto – credit for the concept comes from him (or whoever taught it to him)

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