What is Management by Exception?

A manager’s job is a very tough one. A manager needs to look at the various areas of work and as a manager he has to look after two or more important jobs or activities at the same time for the growth of the business. In order to do all these things in an effective manner, a manager must adopt or practice different management styles and tactics.

One of those techniques is, management by exception which focuses on identifying the significant deviation and plan and brings this deviation to the management’s attention. This is done so that the best method of practice is adopted by the management to avoid the adverse result that may occur due to this deviation.

The Process of Management by Exception

So, here a small explanation is given about what does the process of management by exception looks like? The whole concept about the process of management by exception is very simple and easy to understand. Let’s look at the process of management by exception in details:

1. Setting of Objectives or Norms – The process of management by exception starts with setting up of the standard norms of the business.

Suppose a person is running a shop of books. So here comes a need of analyzing things regarding the sales of the books, expenses and so on. So, the manager needs to set the norms for each task and the manager needs to keep this thing in mind that the norms or the objectives should be easily quantifiable and achievable; for example, the number of books to be sold each month. This would be the general number of books that the business needs to sell in order to meet the expenses incurred and for the growth of the business.

For example - A business sets a target of selling 20,000 books each month.

2. Assessing the performance and comparing it with the norm – Once the norms have been set up, in the next step, the management needs to use the technique of management by exception. The reason is that, it is the most vital part of the process as it compares and assesses whether the actual performance of the business is matching with the set of norms or not. It is done by the management of the business to identify the area of deviations so that the measures are taken by the business itself to deal with that deviation.

In this step, monitoring of the relevant data is also done by the management. The process of monitoring depends upon the nature of the business like how big your company is and what type of data is monitored by the business.

3. Comparison – After the assessment, compare the actual result with the standards.

4. Analyzing the Deviation - After the comparison of the performance and data, we get two possible outcomes:

• No significant Deviation – It means the deviation is very minor which may not affect the objective of the business. Therefore, the company cannot take any action against this deviation.
• Significant deviation – It means the deviation is major in nature and the manager has to bring the deviation in the attention of high-level management. As a result, the management of the company will be able to respond against this deviation.

5. Solving the Exception – After analyzing the deviation, it becomes the responsibility of the management to deal with that deviation. Before taking appropriate action to solve the deviation, first understand what the reason behind the deviation is. As a manager, you need to know about the root cause of the deviation so that the correct action is taken based on those factors which can help in solving the deviation immediately.

Advantages of Management by Exception Technique

• Managers are able to utilize the time in an effective way when it is needed to solve the problems at crucial levels.
• As the managers are not overloaded with the routine task, they have free time so that they can use their full energy, and can concentrate on solving the deviations or the critical problems of the business.
• Technique of management by exception helps in increasing management activities and control.
•  This technique helps in estimating the opportunities and problems that may occur in the near future.
• Management of exception includes both qualitative and quantitative efforts of the manager.

Disadvantages of Management by Exception 

• In management by exception, the current performance is compared with the past results. So, if the past results are not appropriate then it may cause problem in current decision making.
• As it needs a detailed study and observation on the outcomes of the norms, so it requires a financial analyst who can make a summary of the performance and report it to the management. Hence, it results in additional manpower, which may be expensive for the business.
• The system of management by exception only warns the management about the problems and it does not act as a preventive measure.

Principles of Management by Exception

There are some principles of management by exception that are needed to be followed for the system to work properly:

1. A systematic approach – The system of management by exception requires a systematic approach to work. It means all the needs and requirements of the company must be properly understood and known by the management. As the management of exception cannot be achieved without a proper set of standards that’s why the company must be aware of each and every thing that is going on in the business and must have a clear set of standards to follow.
2. A good understanding of the exceptions – It is difficult to run the business by keeping the exceptions as secrets. The management does not involve itself until there is a major deviation, that’s why a good understanding of the exceptions can guarantee that the subordinate will be able to take the correct action to avoid deviation throughout the process of management by exception.
3. A proper delegation of authority – The principle of proper delegation of authority must be there for the system to work properly and in a smooth manner. The deviation may be routine or it may be exceptional activities. There must be a clear structure and division of authority in the organization, so that when the problems occur, the manager and the subordinate manager know what they have to do.

Common Mistakes

Management by exception technique means focusing on key results area (KRA) which means to focus on the deviation which causes loss or due to which the company’s growth hampers. Unnecessarily do not focus on the minor deviation or waste time and resources on those deviations due to which hardly companies can face any problem in future.

Context and Applications

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for

Bachelor in Business Administration

Master’s in Business Administration

Bachelor in Commerce