Rule of Thumb and Law of Fat

PM’s are frequently asked to assess business opportunities such as opportunity / cost, partnership analysis, and office football pools. We’re generally pressed for time – particularly on the football pool. Therefore, it’s helpful to filter the fluff and take a defensible analytical swag (some wild ass guess) up front. This can save you from investing considerable work only to find later there was no chance in the first place. For this, Rules of Thumb and The Law of Fat are handy.

Rules of thumb are as advertised. They involve the basics – addition, subtraction, multiplication, division, and rounding. They provide a dash of estimation that’s, “close enough for government work”. Knowing your business intimately from one end of the value chain to the other is crucial for this to play out properly.

The long and short of it goes like this. Run approximate numbers quickly in your head or with a pencil and paper. By hitting only the pertinent points, for instance, sales volumes and average sales prices for revenue relative to approximate costs to deliver and you can determine whether or not there’s much “fat” in the deal.

Mr. Pareto is helpful here. If you get round figures that capture 80% or more of the deal attributes without breaking a sweat, that’ll work.

Once you’ve conjured up your estimate, check to see how it stacks up relative your company’s revenue, margin, or ROI targets which you should know. If this comparison shows the deal will fly easily, you’re probably in the chips. There’s plenty of fat to cushion the unexpected. However, if you discover a rough cut requires running your calculations to two or three decimal places to see if it works, then walk away.

When the estimates to make the deal work are close enough that precise models are required to justify the business, there isn’t enough room in the business for error. If the financial math must pencil exactly to work, then the program must work perfectly in real life if your product is going to make money. How often does a perfectly run product or program happen? Never. Therefore, you need plenty of fat if you’re going to mint money and that’s why it’s a Law.

With quick Rules of Thumb and the Law of the Fat, you can readily filter ideas landing on your desk. Using simple math can help you determine the high level merit of the business without cycling up your three product management brain cells for a full analysis. This will leave you more time for the important work of analyzing your football picks!