Management By Exception

Management by exception is a business management strategy that states that managers and supervisors should examine, investigate and develop solutions for only those issues where there is a deviation from set standards, norms, business practices, or any other financial goals like profits deviation, quality issues, infrastructure issues, etc. instead of examining and dealing with each routine business activities.

Thus, this concept is a practice followed in the workplace where the employees are free to take certain decisions on their own which does not require the involvement of managers or seniors at higher levels. This provides more workplace flexibility and creates a sense of belonging and accountability. There are fixed standards based on which this process can be followed.

Management by exception leadership, is the system of spotting and reporting a situation to management only when there is an actual requirement of a manager-level staff. The basic purpose is to utilize management time in the most efficient and best possible manner by involving them only when there is an important deviation from the routine or normal business results.

As a result, they will have more time to look into an important matter involving major variances and can give their best in fine-tuning the problem. In contrast, lower-level staff may handle other minor matters directly. In this system, management is provided with a concise, unvaried comparative full detailed report covering all major aspects of the issue. It helps management detect and clear the hurdles that need decision-making and take the best suitable actions.

Management by exception is a management strategy that requires management to ensure its engagement only when there are recorded deviations from the set standard, norms, and benchmarks. It also indirectly helps boost employee morale as they become part of decision-making and problem-solving, which would otherwise have been dealt with by manager-level staff, indirectly giving employees a sense of authority and responsibility.

Management by exception works in the following phases-

#1 - Measurement Phase

Under this first step of management by exception leadership, data regarding business operations are accumulated and evaluated, which includes measuring the performance of all the available inputs ranging from efforts used to achieve goals for the business, its optimization,, cash flow, how financial resources are being used to provide services or manufacturing goods for profit, use and wastage of raw materials and its economy through buying, processing and storing till the delivery of finished goods.

This information involves almost all factors used for quantifiable measurements, such as applying time standards, stock data, balance sheet data, finished goods inspection results, stock available for sales, machinery utilization data, current assets, etc.

#2 - Projection Phase

This phase in the process of management by exception examines the measurements used that are useful for achieving business objectives. Based on historical data, projections are prepared by applying statistical knowledge such as significance, probability, confidence, standard deviation, sample size, and correlation. After this, plans are developed according to the forecast. In the current scenario, a complete forecast strategy is extensively checked from all possible outcomes like procedures and existing policies, capability and adequacy of equipment and staff, organization structure, etc. If required, plans may be amended.

#3 - Selection Phase

Under this phase, after thoroughly screening all the plans, the best one is selected and implemented. Accordingly, the system is adopted, which the management thinks is best for achieving business objectives.

#4 - Observation Phase

Under this phase, the selected process, strategy progress, and performance are monitored periodically. The system must possess qualities like it must be automatic, reliability, and adequate. Adequacy here means data must be precise, neither too big nor too small; it must be up to the mark carrying all relevant information required.

#5 - Comparison Phase

Under this phase, work progress is evaluated and compared with a predesigned roadmap to identify deviations, if any. Depending on the nature of deviation, it is categorized as major, minor, or any other class of deviation.

#6 - Action Phase

Further action points are developed based on the deviation identified under the comparison phase. Strategies are implemented to bring the capacity and performance to the desired level or to make any forecast change to ensure optimal performance.

Some of the important principles related to the concept of the process of management by exception are given below.

• Delegation of authority – The concept is based on the approach of authority delegation to a certain level of employees so that they can handle them independently and take their own decisions. This leads to division of responsibility and increase accountability.
• Systematic approach – The method or approach followed in the process should be based on certain steps and there must be methods to keep track of deviations. The persons responsible to take decisions should be able to identify problems and devise solutions for the same.
• Professionalism – For the purpose of delegation of work suitable training is provided to the concerned people so that they are able to handle the problems efficiently. This ensures increase in productivity and professional enhancement. This also leads to setting higher standards with increased potential to achieve them.
• Sense of leadership – This kind of workplace practice promotes a sense of leadership and responsibility towards the organization. The higher level professionals can concentrate of complex business issues while others can concentrate of achieving daily objectives.
• Teamwork – It also helps in teamwork and partnership, where the employees of all levels learn to adjust with each other while solving problems. This increases the professional standards and promotes peace and cooperation.
• Analysis – Since the process requires the decision makers to analyse and identify problems and devise solutions, it requires skill, experience and knowledge to do so. The capability to do such nalysis is extremely important to achieve the objective of the business.

Thus the above are some important principles that form the basis of such a practice management by exception in management and at the workplace.

Let us understand the concept with the help of a suitable example.

Financial Example: The chief financial controller (CFC) of Henry Inc. is heavily engaged with varied works, meetings, and other engagements. To reduce the burden of his work, management has once, after thorough analysis, developed the following defined limits beyond which matter needs to be reported to CFC and require its prior approval: –

ABP Sales and expenses were $8,00,000 and $6,00,000 whereas actual sales and expenses were $ 6,00,000 and 3,00,000. Determine whether the matter needs to be reported to CFC?

Solution:

1. Revenue: Actual revenue is $6,00,000 which is more than 50% of ABP ($8,00,000 x 50% i.e. $ 4,00,000) Also more than $5,00,000. Therefore, this mater will not be reported to CFC as conditions are not met.
2. Expenses: Actual expenses are $3,00,000, which is more than 40% of ABP ($6,00,000 x 40%, i.e., 2,40,000) and had also exceeded the $2,50,000 limit, here matter becomes crucial and needs to be reported to CFC for further analysis and decision making for correction and matching with set standards.

The above example clearly shows a perfect scenario of management by exception in management where it is to be decided whether the matter has to be escalated to higher authority of can be handled by the lower-level management. It points out certain criterias that may help to determine who should have the authority to take decisions in such cases.

It is necessary to understand the advantages and disadvantages of the concept of management by exception in detail so that it can be implemented at the proper time and place to achieve suitable objective. Let us study the advantages first.

• It helps in the best possible time utilization as managers are asked to resolve problems only at crucial levels.
• As managers are free from routine work, they can apply their full energy with concentrated efforts on critical problems.
• Due to the limited workload, managers can undergo an in-detailed analysis of the work.
• Management activities and control are increased by management by exception.
• It helps in accessing past trends and old work easily.
• It predicts the management opportunities and problems that may arise in future.
• Both qualitative and quantitative efforts are involved in this process.
• It lowers the amount of financial and operational results viewed by the management.
• It helps the lower and subordinate staff to implement their ideas to achieve the desired target.

The disadvantages of the concept are given below:

• It is based on past results with which current data is compared. Accordingly, if the past data is improper, there may be problems in current decision-making.
• It needs a detailed study, observation, and reporting system, so it requires a financial analyst who makes summaries and reports and presents them to the management, hence requiring an additional workforce.
• The system will not warn until the problem occurs, i.e., it acts as corrective instead of preventive.·      
• It cannot measure human behavior. Therefore, sometimes it is difficult to implement.

Active management by exception is where the management is active in advance to deal with the situations, assisting in problems, has real-time participation in all activities, and keeps an eye on what his staff is doing to overcome mistakes.

The second one is passive management by exception, where management interrupts only when the desired goals are not met, the change in planning needs to be done, and corrective actions are required. This method usually comes into action only in case an unusual event happens. Each method is important, and one can choose either based on business requirements.

A passive approach is useful for businesses with a relaxed environment and staff understanding their roles and responsibilities. It may help to encourage staff morale and be independent. While an active approach can be used by less attentive, new employees with lower staff, more stringent organizations as they need step by step guidance to complete their work.

This has guide to what is Management By Exception. We explain it with example, principles, advantages, disadvantages & characteristics. You can learn more about it from the following articles –

• Full-time Equivalent
• Scenario Planning
• Cost Management
• Earnings Management
• Management Audit