With Fritz, his pet Schnauser, yapping by his side, Terry Butcher is a picture of contentment, and little wonder.

Every morning the Inverness Caledonian Thistle manager wakes up, fetches Fritz his breakfast, and then the two of them take some air around the village of Abriachan, right at the head of the Great Glen, where Butcher has made his Highland home.

"I can't describe to you how beautiful I find it up here – it is fantastic," he says. "The views are amazing where we live, unless the mist has come down. I love it here, I'm extremely happy."

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Thus speaks a man, after a lauded playing career and a distinctly haphazard one as a manager, who has finally found peace and contentment – and success. Butcher's restoration of Inverness, against all conceivable odds, has been the talk of Scottish football this season, and today his team takes on Hearts in the Scottish Communities League Cup semi-final at Easter Road.

There is something about Highland life and this genial, garrulous Englishman which makes for a perfect marriage. You would think that Butcher, having played in some of the greatest stadiums in the world and among the world's greatest players, might find his beat in Inverness a little drab or low-key, but far from it.

Have you seen the clips of him on television: pumping his fists and thumping his breast in front of motley gangs of Inverness fans? This is a man who savours what he has in his life right now.

"Sometimes the main stand in our stadium even chants my name – can you believe it?" says Butcher. "I cannot describe to you the feeling in taking a team like Inverness Caley Thistle and seeing them play like we are right now. It is an indescribable feeling, a euphoria you feel at watching something work. I feel like I've won the lottery being in the Highlands. Every week I see the smiles on our fans faces.

"I'll have been here four years come Sunday, and it has been a long journey in a way. It's been no bed of roses, either, believe me. We suffered relegation and had to bounce back from that and rebuild this club. The club is in much better nick now than it was two or three years ago."

This overflow of contentment is a sufficient explanation for why Butcher recently turned down a firm and persistent effort by Barnsley to recruit him as their new manager. In some ways, in football terms, it was a bizarre decision by Butcher not to go to a club with far greater substance, in terms of stadium, fans and resources.

But there was another factor which counted. In his rollercoaster life as a manager, Butcher has perpetrated quite a few cock-ups – that miserable interlude in Australia with Sydney FC in 2007 and then those dire 18 months at Brentford. Now, in Inverness, he has peace and fulfilment. Why throw it all away?

"I was sorely tempted," he says of Barnsley's offer. "It is a big club, with a great fan-base and a good foundation. Yes, of course I was tempted. Yorkshire is a lovely place. The money they were offering me was excellent as well. But I go on my gut instinct. I've always trusted that. My assistant, Maurice Malpas, said to me, 'look, go with what you feel, go with your gut instinct in this.' I said to him, 'Maurice, my gut instinct is saying no, stay here, this is good, this is great.'

"This is among the longest I've ever been at a club. Normally I'm 18 months here, 18 months there – though I was five years at Motherwell, which was also very satisfying. But to clock up four years here in Inverness is something I'm pretty proud of. I love the club, I love the area, I love the community here."

There has also been internal change within the man himself, which Butcher claims can account for his recent success. Two years ago, after a particularly explosive match at Ibrox, he threatened to smash a bottle of red wine over a match official's head. That comment was said in typical Butcher jest, though a small part of him meant it. He also used to prowl and snarl by the touchlines – habits he claims to have long since abandoned.

"I'm much more mellow, much more relaxed," he says. "I give my team talk and then just let my players get on with it. I just sit back on my arse. I used to be like a coiled spring – I was like Zebedee from The Magic Roundabout – but now I'm more like . . . what was the fellow called, the relaxed one? [Dylan].

"Also I must say this: at my club right now I'm looking at the best dressing room I've known here. I know I keep saying it, but the spirit in our dressing room is unbelievable – it is the best I've ever known in football, and I've been in some great dressing-rooms at Ipswich, Rangers and with England. If you have that kind of dressing room, then you have a chance."

This Inverness team is the third that Butcher has had to create, following many a chaotic summer of comings and goings. Last summer Jonny Hayes, Gregory Tade, Greg Tansey and others left, and another batch of "unknowns" duly arrived. No-one, in truth, gave the Highlanders a hope of vying for second place in the Clydesdale Bank Premier League and grabbing a European spot.

"I wanted to keep Hayes, Tade and Tansey but it was impossible. So off they went," says Butcher. "Financially, we can't compete with other clubs, and Inverness face other problems as well. But what we can say to a player is, 'look, we will give you your chance here'. But this season has also reminded me that a football club is only as good as its senior pros – they are the catalyst. In Richie Foran, Owain Tudur Jones and Ryan Esson I have some brilliant senior pros here."

Butcher is 90 minutes away from a Hampden final, though to look at both him and Fritz, you would hardly know it. There is no quickening of the pulse or change in gear ahead of this afternoon in Edinburgh. The pair of them set off on their walks together, happily taking in the Highland air.

"Bring 'em on, I say," Butcher says of Hearts. "It's just another game for us. We're not intimidated, we've no inhibitions. I now know how good my team is."

But does Butcher now know how decent a manager he is? I text him later to ask him for three adjectives to describe his career to date. "Average, reasonable, getting better," he replies.