Management by Exception

Management by exception is a corporate management style that focuses on identifying and managing cases that deviate from best project management practice.

The idea behind exception management is that managers should devote their (limited and valuable) time only to important, tactical or even strategic activities.

Management by Exception is a management style in which managers intervene only when their employees fail to meet certain performance standards or when things go wrong. If employees behave as expected, the manager does not intervene. Time and effort should not be wasted by focusing on employees or parts of the organization where things are going well.

Management by Exception is also used to describe the provision of information to management where only significant deviations from budgets or plans are reviewed as a basis for corrective action. The goal is to reduce the amount of detail contained in management reports and statistics on which action can be taken.

Management by exception applied to the business is a management style that gives employees the responsibility to make decisions and carry out their work or projects independently. If an unusual situation or deviation from the standard arises that could cause difficulties for the firm and cannot be managed by the employee at his or her level, the employee should move the decision to the next higher level.

First, you should set goals or standards with predictable or estimated results. These performance is evaluated and equated with actual performance. Next, the deviation from these estimates is analyzed.

With an insignificant or insignificant deviation, no action is required and managers can focus on other issues.

If actual performance deviates significantly, the alert level must be scaled down to managers: the goal is to resolve this exception immediately.

For example, if all products are selling at expected volumes, except for a particular product that is underperforming or overperforming by a statistically significant margin, only the data for that product will be presented to managers for further investigation and discovery of the root cause.

Management by exception is intended to reduce the management burden and allow managers to spend their time more effectively in areas where it will have the greatest impact.

The difference between estimated and actual figures is defined as variance. To understand the cause of the difference, managers need to investigate how the variance differs from the most recent period and what causes the estimated figures not to be reached. Analysts consider two types of variance: adverse variance and favorable variance.

• The unfavorable variance exists when the difference between the budgeted and the actual figure leads to a lower profit than expected;
• The favorable variance exists when the difference between the budgeted and the actual figure leads to a higher profit than expected.

Rather than considering all variances, managers must establish criteria to determine which variances are significant. Management by exception focuses primarily on large negative variances, to find areas of business that deviate from established standards in a negative way.

Management by exception involves two distinct approaches:

• In active exception management, the leader is proactive in assisting problems and actively participates and observes subordinates to prevent errors.
• In passive exception management, the manager intervenes only when standards are not met and action is needed, usually after something has happened rather than along the way.

Benefits of management by exception

The main advantage of management by exception is that issues are identified quickly and managers are able to use their time and energy more wisely for important issues rather than less important ones. In addition, managers need to work less on statistics and the frequency of decisions becomes less frequent, which saves time.

In addition to a control technique, Management by Exception can also be a motivational approach.

It fits well into an organizational philosophy of employee empowerment, where managers delegate as much responsibility and activity as possible to those below them, intervening only when it is really necessary.

In Management by Exception, only decisions that cannot be made at a lower level are passed on to the next higher level.

While managers make fewer decisions, employees have more responsibility, which increases their motivation.

Disadvantages of management by exception

The occurrence of errors in budget calculation leads to large differences in deviation and the search for errors can take a long time. In addition, financial analysts in charge of evaluations increase a company’s overhead costs. If financial analysts do not get good results, it becomes a waste of time and money.

Another disadvantage is that only managers have the power over really important decisions, which can be demotivating for employees at a lower level. In addition, it takes time to pass the issues to managers.

Bibliography:

• Variable Budget Control Through Management by Exception and Dynamic Costs, , Fred V. Gardner
• Management by Exception: A Handbook with Forms, Donald P. Mackintosh