Management by Exception – Definition, Principles, Examples

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Being a manager is a tough task. You need to be able to divide your attention between different things, each looking like the most important thing to solve. As a manager, you need to juggle many tasks to guarantee the business succeeds. In order to get things done and keep employees motivated, you might employ different tactics or management styles.

One such style is management by exception, which can help the management understand where their attention is to most needed. Let’s delve deeper into the concept, the way it works and what its principles are. I’ll also look at the advantages of the popular method, as well as outline some of the drawbacks you must be aware of before opting for the framework.

THE DEFINITION

So what does management by exception mean? Firstly, it’s one of the many management practices or styles. It provides you with a specific type of framework that guides the way your management goes about planning, organizing, and controlling, i.e. the core management functions. It provides a set of processes and principles you choose to follow and implement in your management.

The second point to know is about the core idea influencing the principles. The principles are built around the concept of ‘exception’. As you might have guessed, this means the focus of the manager is on things deviating from the norm. As a manager, your attention will be on noticing the things that are not quite right – the things deviating from the norm, i.e. the exceptions. These deviations are examined in the various operational, and especially financial areas of the business.

For example, if the norm performance of the business calls for expenses to stand at $50,000, the style would focus on examining the results when the deviation is significant. The style would alert the management when expenses are $70,000 or even $30,000. This would be a situation of significant deviance; your business is suddenly either spending a lot more money or has suddenly seen the spending drop. In either case, you would like to know why the deviation has happened and use the information to correct or to improve the situation. Remember that management by exception always calls for this strong or significant deviation. If the expenses stood at $49,000, the difference wouldn’t really matter as much. The $1,000 difference could simply be due to constantly changing electricity prices, for example.

If you put the above together, you can define management by exception in a similar vein to the Business Dictionary, which states that management by exception is a,

practice whereby only the information that indicates a significant deviation of actual results from the budgeted or planned results is brought to the management’s notice”.

Furthermore, the definition goes on to explain how the goal of the framework is the facilitation of management’s focus on essential tactical and strategic objectives. This refers to how the framework focuses on financial and operational processes – these are considered to be the most significant in terms of ensuring smooth functioning.

Indeed, if you think about it, deviations in business finances can be a sign of problems or great success. If your business is suddenly spending a lot more or the cost of making a product has changed, you naturally will see the effects ripple down to other areas. You won’t make enough profit or you can’t produce as many items, for example.

Management by exception, therefore, makes the management’s job a little easier by directing its focus on the key areas and telling the management to only pay attention when the situation drastically changes. In a way, the framework says, “if it isn’t broken, don’t fix it”, or if you don’t have a noticeable problem, don’t spend energies analyzing or monitoring it.

Remember to not mix management by exception with exception management. This is a different concept, which essentially focuses on managing all exceptions. It’s not a management specific process or a management style, but a framework where attention is given to all exceptions and deviations. These can occur outside of the operational or financial framework, in areas like infrastructure, legal issues and so on.

THE PROCESS OF MANAGEMENT BY EXCEPTION

So, what does the process of management by exception look like? What does the above mean in real life?

The whole concept is actually simple to understand, although as I’ll explain in the next sections, not the easiest to implement adequately. The process requires just a few objectives: setting the objectives or norms, assessing the performance of the chosen objectives, analyzing the possible deviations, and solving the exceptions. Let’s look at each section on its own:

Setting objectives or norms

The process begins by establishing the norms for the chosen procedures. Consider you are running a hamburger shop and you’d like to monitor things such as sales, expenses and so on. You would need to establish the norm or the objective for each task and procedure. The norm should be something easily quantifiable and achievable. It could be the general number of burgers you sell each month, for instance. This would be the number you need to sell in order to meet the expenses and grow at a steady rate. So, you would set up the norm, which in this instance could be 15,000 burgers sold.

When you are setting the objective and the norm, you want to focus on predictable and estimated results. You shouldn’t just pick a number or other norm from thin air. You can’t say “I’ll set the norm at 20,000”, if you can realistically only sell about 10,000. Finding the right norms and objectives won’t be easy, and you should spend enough time analyzing data to understand what the baseline for management and operations could be.

As well as setting up the norms, you are also outlining the deviations. What constitutes as an exception? You now have the norms, but what would be a variance that would cause you to investigate it further? You might initially think, “any exception is surely worth looking into”. But that’s not the case, as explained above. You wouldn’t have time to do anything as a manager, if you examined each change in performance.

The key is to understand the variances that require attention. For example, you might notice that on a hot day, the workers don’t produce quite as many finished cakes. This little occurrence might cause a change in sales for the month, but it’s probably not big enough to cause alarm. On the other hand, if the electricity price goes up and the expenses go up by 3% for the whole month, you definitely have a situation at hand.

The deviations worth noticing depend on your business and the norms. As a general clue for financial exceptions, a variance of less than 0.1% of the norm is not a significant change. To find out the right deviations, you need to use mathematical formulas, such as statistical control charts, and study your business metrics carefully.

Assessing the performance and comparing it with the norm

Once you’ve established the norms, you can begin using management by exception. The most crucial part of the process is monitoring the relevant data sets and assessing whether the actual performance matches with the norms. You need to ensure you are gathering all the relevant data and monitoring systems in real time.

The monitoring process can be different depending on how big your business is and what type of data you are monitoring. You can use automated monitoring programs that collect and compress data for you, providing you insight into the results. On the other hand, you could manually check the reports to notice the deviances.

As you start gathering data regarding the current performance, you can start comparing it with your chosen norms. You want to do this to ensure you notice any deviations from the norm and can then move on to dealing with them.

Analyzing the deviation

There are two possible outcomes to comparing your performance data with the norms. You either:

  • Find no significant deviation, in which case you don’t take any action. As mentioned above, you don’t need to respond to small changes.
  • Find a significant deviation, in which case you take the following step of informing the appropriate management level about the issue. This could be the manager right above you or a high-level manager. If you are a manager, you need to either respond to the deviation or report it higher up in the chain, depending on the procedure.

Deviations shouldn’t just be accepted as they show and corrective action should only be taken once you are clear about the reasons behind the exceptions. You need to remember two things. First, a human error might have been behind the problem or other anomaly changed the results. This might mean the deviation is not actually as acute as it might seem. The second thing to keep in mind is that deviations are not necessarily always to be corrected. In certain instances, the variance might occur because of improvements in a specific procedure. So, never start solving your problem without analyzing the root causes behind the deviation.

Solving the exception

It then becomes an issue for the responsible management to deal with the deviation and to respond appropriately. As I just mentioned, understand what is behind the deviation before you solve it. Did the sale of hamburgers drop just because there was a human error in entering the sales on one day? Did the burger sales decline, while chicken nuggets suddenly went up?

As a manager, you need to know the root causes for the anomalies before you can solve them. Remember that in certain instances, you might need to tweak your norms. For example, if you include a new product to your product line, the expenses have to up and so on. So don’t just implement your management by exception formulas, but continually review them.

PRINCIPLES OF MANAGEMENT BY EXCEPTION

So, the process of management by exception is essentially about ensuring the management focuses on the policy strategies and decisions, getting involved with the day-to-day activities only when large deviations occur. What about the principles? What are some of the core characteristics you need to ensure are in place for the system to work?

A systematic approach

Management by exception requires a systematic approach to work. What this means in practice is that all the operational needs and requirements of the organization must be properly understood and outlined. Essentially, the organization must be aware of everything going on and have a clear set of standards it follows. Management by exceptions cannot be achieved without a proper set of standards and procedures. Quite simply, you can’t notice deviations, if you don’t even know what the standard or the so-called norm looks like.

The framework requires a rather meticulous approach to implementation. In order to establish a systematic approach and guarantee positive results, your should take the following steps:

  • Analyze operational needs and requirements, as well as data.
  • Create and maintain a set of policy standards.
  • Collect, classify, draft and interpret reports.
  • Make decisions based on the pre-determined requirements.

If you have a set of goals for the management style, you focus on determining the deviations your organization should be alarmed by, and you establish a routine for collecting and analyzing data, you can make the system work in a systematic way.

A comprehensive organizational policy

A big part of the systematic approach is focused on the principle of organizational policy. The organization has to have a pre-determined and pre-established policy, which determines the objectives and the policies management and other levels of the organization must follow. Having a comprehensive policy in place will make it easier to determine the deviations, but also to guarantee all levels of the organization follow the same set of rules.

The key thing about a good organizational policy is that it should focus on accountability. You need to ensure each level of management has to subscribe to the rules and follow the same procedures. If there are differences in responsibility and other such issues, these should be clearly stated in the policy and everyone should be aware of them.

You do not want to be in a situation where certain people are in the dark about what is expected of them or what the process might be for others. The instructions and expectations must be clearly outlined and expressed. You can find great tips for organizational policy online at Clack Nuber.

A good understanding of exceptions

Linking to the above principle, management by exception requires the whole organization to be aware of the deviations. You can’t run the system by keeping the exceptions as a secret or only something the reporting team will know of. The more the team understands what is expected of them and what should cause alarm bells, the easier it is to spot the problems or to guarantee they don’t occur in the first place.

Since management won’t be involved until there is a major deviation, a good understanding of the exceptions can guarantee the subordinates are able to perform corrective actions throughout the process. Furthermore, although certain deviations might be reported directly to the higher management levels, with the decision-making power in their hands, managers must be aware of the exceptions as well. Again, it can all help in you understanding the issues and keeping an eye on it throughout the process. It can also guarantee a more amicable solution to problems.

Let’s say you were the manager and you would know the expenses are not a problem until they would deviate around 5% from the norm. If you’re subordinates are unaware of this, they might not think too much about the reported changes in third supplier products. On the other hand, if they are aware of this, they can take pre-emptive action and report their findings to you or the floor manager might strike a new deal with the supplier to cut the costs.

A part of the understanding of exceptions deals with the difference between routine and exceptional activities. In the context of management by exception, managers need to know what tasks and processes are routine, i.e. can be dealt by the lower levels of management or the subordinates.

For example, these could refer to checking if orders go through normally and whether third party supplier deliveries are in order. The deviations in these routine tasks and processes can generally be dealt with by the lower level management. For example, if the order expenses are exceeding the pre-determined sum, the lower levels of management can find out what is causing this and whether they can sign a new deal with the supplier or change to a new one. On the other hand, the exceptional activities require the attention of the higher level of management.

These would be the more crucial activities in terms of the whole organization. For example, the overall human resource cost might go up, threatening the bottom line. The top levels of management would be the one to decide on the appropriate action and whether the best way is to lay off staff or find other cuts elsewhere in the budget. In general, the exceptional activities often include more than one possible solution.

A proper delegation of authority

For the process and framework to work, a principle of proper delegation of authority must be established. As I mentioned above, the deviations can generally be divided into the routine and the exceptional activities. There must be a clear understanding of this division and a well-set command structure for authority. When there is a problem or an exception occurs, the subordinates and the managers need to know what they are supposed to do.

You don’t want to end up in a situation where a deviation occurs, but the correct authority is not informed. This principle is almost like running a ship. If there is a problem with one of the engines, the first worker to notice this would probably be required to report it to his or her floor managers and not run directly to the captain. If the management notices that the engine failure is threatening the ship, then they know the authority lies with the captain. Knowing who is able to make specific types of decision and who to contact at different times is important for ensuring management by exception works smoothly.

A continuous development of subordinates

Finally, like with many management theories and styles, you need to include subordinate development as part of your management by exception framework. I’ll delve into the benefits and problems of the style later on, but you need to know the system is not the easiest on the employees.

Since the management only proactively engages subordinates in the event of problems, you need to guarantee the workforce is as skilled as possible. You should provide training, not just about the style itself, but of other areas related to the subordinate and his or her role. Furthermore, the training should also focus on improving the person’s management capabilities. This will provide your organization smoother succession options and ensure the next managers come from the in-house team.

Development and training are also keys for guaranteeing motivation. Since management by exception can be a job that provides subordinates with more options to take responsibility, you can boost the motivation by ensuring the job feels rewarding and their roles supported by the high-level management. The introductory video to training and development by the Indiana University of Southeast is great for learning a bit more about this important element in management:

EXAMPLES OF THE FRAMEWORK

Before I explain the advantages and disadvantages of the system, let’s consider a few real life examples of the framework. What are some high impact situations where management by exception can prove to be useful? The examples should hopefully also highlight to you what the process can look in action.

Call centre management

The system can work well in a call centre environment. If you are a floor manager at a call centre, instead of dividing your time between dealing with customer service complaints and monitoring individual performances of the employees, you could just focus on the service. The system would be set up so that major deviations, such as a big complaint, would be picked up by the system, but the actual call performance probably wouldn’t.

As a manager, you wouldn’t be micromanaging how well the sales are going or monitoring the individual performance of the employees. Instead, your time would be spent on dealing with the biggest deviations; those that could also have the gravest consequences: customer service complaints. Whenever a customer complaint would be lodged, you would turn your attention from calling to solving the issue. The framework frees up a lot of time, reducing management expenses. Instead of guiding and monitoring employees, you spend the time solving the most important problems.

Project management

The management by exception model can also be used in terms of project management. What does a project manager generally do? Well, organises regular meetings to keep up with the progress of the project. But under a management by exception system, the regular scheduling of meetings and a catch-up of current work would be completely stopped.

Instead, the manager would only organise a meeting if an important issue or a deviation would show up. The conditions would be pre-determined and could be calculated based on certain financial metrics. You might automate a system where a meeting is held if a deadline is missed by 5%, for example.

Just like with call centre management, the framework will free-up time for the manager to focus on other things. In terms of meetings, it also ensures the whole team doesn’t waste time going through the project when there is no real need to do so. The time saved for the meeting is spent of working on the actual tasks and not discussing them. Nonetheless, if big problems occur in the project, the management is ready to tackle them.

Sales management

Finally, a good example of a situation where management by exception can be used is sales management. If you implement the framework, you move the management’s focus from the sale process, towards solving problems and improving marketing and product development. Just like with call centre management, the managers won’t be interested in micromanaging the sales or monitoring individual performances.

Instead, the management with set a group of sales Key Performance Indicators or KPI’s, which are explained in the image below. If there is a deviation in the pre-determined figures, the management can take a closer look at the problem.

Therefore, you become involved with the sales proceedings only if the team is clearly underperforming. The system can be useful in allowing the management to direct its attention to boosting revenue in meaningful ways, instead of trying to boost individual performances just by a bit.

THE ADVANTAGES OF THE PROCESS

I’ve now shown you the process and principles of management by exception, but you might be still wondering its validity. What makes management by exception an advantageous framework to use? Well, there are plenty of reasons you should consider the style and I’ve outlined them in the below graph.

The advantage Creates a more efficient use of management’s time
How?

Since management by exception only focuses on the notable deviations, managers aren’t wasting time evaluating and monitoring areas where things are running smoothly. Their undivided attention is only on issues that are not performing as required, not spending time on things that are.

Not only is the management spending their time on fixing the problems that require the most fixing, they also free their time from unnecessary decision making. The framework will establish the ideas of what constitutes as a deviation beforehand. The management has clear guidelines and reporting systems to notify when these situations occurs. Instead of having to make a judgment call or think whether you must act to fix a thing, you know exactly what requires your attention. Let’s say the sales have grown blow the required 5% and only hit 4% margin. Under many other management styles, you’d need to look into it and figure whether to act on it or not. With management by exception, you know if the deviation is strong enough to cause a reaction. In fact, you probably wouldn’t even look at the figures unless the metric had been set to count as a deviation.

The advantage Identifies problems quickly and finds solutions fast
How?

It can automate the process of noticing a deviation, especially in the areas of financial reporting. This means the deviation is spotted immediately and not after someone manually goes through the books. You can set the parameters – for instance, a deviation in expenses is 10% increase or decrease to current level – and you’ll automatically receive a notification when this happens. Since you learn about the deviations instantly, you can solve the issue more quickly.

The advantage Boosts the motivation across the organization
How?

Management by exception is a more relaxed way of managing and it allows employees to make decisions as well. Since management is only involved in situations that require attention, employees are able to make decisions and follow their chosen methods, as long as the methods are effective. Therefore, the employee feels less monitored and controlled, which can boost motivation.

The boost for motivation also happens because the framework allows flexibility and creativity. Since the focus is only on exceptions and deviations, the way you reach results doesn’t matter. Employees are able to try new ways of working, which might help yield positive results. The creativity of your employees is not stifled. You aren’t saying to them, “You must do this”, but rather allowing them to find the best way that yields the right results.

Management by exception can work well in situations where being proactive is not required. It can streamline business operations, creating efficiency within the management. If your business is up and running already, with effective and well-defined processes in place, you can utilize the style to your advantage. You already know what works and so, you’re only interested when something out of the ordinary happens.

THE DISADVANTAGES OF THE PROCESS

You might be thinking the above sounds a bit too good to be true. Surely, no management framework or process has just the benefits on its side? That’s the right conclusion to make. While management by exception is extremely beneficial in certain circumstances, you need to keep a few drawbacks in mind before implementing the system.

The disadvantage Requires s well formulated and systematic system
How?

Management by exception is not an easy system to implement. Since it’s largely based on financial reporting and data, you need to include proper monitoring and reporting software to business activities, as well as use financial analysts to help get started. As you are focusing on identifiable metrics, you need to ensure these metrics and the so-called deviations are appropriately calculated. If your deviations are not formulated properly, you’ll end up causing more problems. Let’s say you’ve calculated the problematic deviation from growth to be 5%. But the actual deviation for slower growth figures might be 4%. But due to your calculations, you won’t start paying attention until the deviation hits 5%, meaning you might have lost a lot more profit. You can probably see, how crucial the right formulation and implementation is?

Furthermore, the approach tends to focus on an existing budget in many of its calculations and formulas. What this means is that you use a current budget as a the point of which results are compared. But as mentioned above, your budget could have a single variant wrong, causing you to create a system that focuses on irrelevant deviations. If you calculate your spending wrong, the mistake can haunt your management by exception anymore from the spending changes to profit growth.

Why is all of this a disadvantage? Well, implementation can take a lot of time since you need to ensure the formulas are correctly calculated. It can also require outside expertise and extra software, all of which can impact your bottom line. Management by exception is not a cost-free solution to management.

The disadvantage Includes lots of monitoring and a centralized management structure
How?

Although you won’t need the management to monitor or control quite as many things on the day-to-day basis, the system itself has to check upon a lot of data. The monitored financial and operational information must be comprehensive to guarantee the most accurate results. Depending on the business and its size, this can be difficult to organize and achieve – not to mention adding to the costs.

Furthermore, you are following a centralized management structure, where the key decisions are reserved only in the hands of the manager. While the problem is brought to the attention of the management quickly, having to wait for the management’s decision and then implementing it can take longer than if an employee or a low-level manager would have just fixed the problem. The system is build around command-and-control structure, which does have it’s own challenges.

The disadvantage Emphasizes management’s ability to solve problems
How?

While the system allows employees a certain level a flexibility, which can have a motivating effect, there is another side to the coin. Management by exception still reserves the main decision taking for the managers. When the deviation occurs, the frontline staff (who might notice the occurrence in the first place) is not able to do anything without consulting the management.

And it’s not just about taking away decision-making abilities. If you’re performance deviates from the norm, you are going to be in trouble, especially if the deviation is not ‘good’. The management will react to deviations and this can cause employee motivation to drop or lead to a creation of fear. Employees might be scared to try something different or go through with certain decisions just because they are unsure of the results and the repercussions. What if you suddenly decrease the sales? What if you take a sick day and it causes the system to flag you as ‘deviance’? These kinds of thoughts and behaviors can start limiting your ability to go through job duties and hinder motivation.

For certain businesses, the reactive rather than proactive approach can be difficult. Not all problems in business can be efficiently dealt with only after the problem has occurred. In many instances, you need a forward-looking approach, where risks need to be limited before things go wrong.

FINAL THOUGHTS

Management by exception is a great management method to ensure the manager’s attention is fully on the most pressing of issues. It can help direct focus and create an environment where real problems take priority. In fact, management by exception can be a handy tool for prioritizing work, from sorting out day-to-day activities to creating proper authority structures. It can help ensure the business performs to its highest standard.

But the style requires a lot of resources and a highly systematic approach to work. If you aren’t able to determine your norms correctly, you can end up missing vital problems. Furthermore, the style isn’t a proactive way to manage your team, but rather a reactive solution to solving problems. In certain instances, you won’t mind reacting, but on the other hand, you don’t always want the problem to become a noticeable deviation before you tackle it.

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