Definition - What is Management by Exception?

Management by exception (MBE) is a management strategy in which managers will only step in when there are significant deviations from planned outcomes. These can be either operational or financial outcomes.

Manage by exception. Only require reporting when there is a deviation from the plan.Brian Tracy

Assuming that businesses recruit competent people, they are quite capable of getting on with their jobs without intervention from management. By focusing on strategic business goals and plans, managers are able to enhance the value of their contribution to the business. However, when performance isn’t up to expectation, managers should step in. These are the “exceptions” where management action is needed to ensure the company meets its targets.

How Management by Exception works

Management by exception consists of four steps:

Setting the objectives and defining what the norm should be
Assessing performance to see whether performance is on track
Analyzing work or records to determine where performance deviates from objectives
Investigating and solving the exceptions to the norm

Sounds easy, right? The reality, however, is not as easy as it may sound.

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Setting objectives

The first step in the process of management by exception is to set realistic targets to use as a benchmark. Key areas could include sales, production, and expenses. Unfortunately, you can’t just say “I want to sell a million dollars’ worth of product this month,” if you run a small business, the goal could be unreachable. If the business is large, you could be underestimating its potential.

Businesses usually look at records to determine the correct norms. If you want to build in a small percentage of growth, go ahead, but be realistic. Budgets present a great starting point. After all, if you have set limits on costs and targets for turnover and profits, you can use them to monitor progress.

But you don’t want to react too late. Even a month of deviations could cost you dearly if you only pick up the deviation at the month’s end. Consider splitting up targets and monitoring into smaller chunks that will allow management to be responsive.

Now that you have targets, you can set about defining what constitutes a deviation. For example, zero-point-one percent more or less than your target shouldn’t be a train smash, so what constitutes a deviation that calls for management action?

In complex businesses, statistical control charts are drawn up to determine the effect of deviations, but if your business is a relatively simple one, common-sense and a bit of number crunching should give you the answers.

Assessing Performance

Before you can assess performance, you need accurate, real-time performance records. What data will you collect? How will you collect it? How often will you assess it? The first two of these questions depends on you and your business, but the final one has a general answer: the more frequently you can assess performance data, the faster you’ll pick up deviations, investigate them, and address them.

Since gathering a great deal of data manually can take even more time than management by exception is meant to save, automated record keeping and analysis is best. Thus, software that monitors, reports and analyses workflows and accounting software that produces financial analytics would be examples of software that you will find useful.

Analyzing your deviations

You will very seldom get results that match your targets down to the last detail. However, there’s no point in investigating insignificant deviations, so the analysis is based on significance. When analyzing your reports, you will reach one of two conclusions:

There was no significant deviation. In that case, there’s no need for further action.
One or more deviations are significant. If you reach this conclusion, it’s time to take action. If the data is analyzed by an employee or a junior manager, they must know who will take the required action and what to report to their superiors.

If you are handling a deviation, the first step is to see why it happened. It could simply be a mistake in the data. Alternatively, there could be a very good reason for the deviation. For instance, if you’re selling ice cream, a chilly day will cause your sales to plummet. Deviations can also be a good thing. Perhaps your staff is trying a more efficient process out, or there has been a significant saving on an expected cost.

Resolving Exceptions

Now that you know what performance criteria have not been met or have been exceeded and why it happened, it’s up to you as a manager to decide what corrective action to take. In addition, you need to decide whether the exception is likely to recur and whether it impacts other targets. The changeable nature of the business environment, both internal and external, means that you will need to keep revisiting and revising your benchmarks.

Let’s say business expenses have risen by three percent. Do you need to revise your sales targets? Would it be realistic to do so? Are there areas where you could be saving costs to mitigate the effects of increased prices? How will these changes affect your benchmarks?

Advantages of Management by Exception

Best use of management time: The most obvious advantage of management by exception is the way it impacts on how managers use their time. Why monitor, analyze and micromanage things that are going smoothly? When things are going well, employees can make their own decisions, leaving managers free to focus on decision-making that’s related to problem areas.

Rapid response: If your monitoring systems are responsive and up to date, management by exception spots any problems in good time. If automated systems alert you to problems immediately, all the better. There isn’t time for the deviation to have a compounded effect.

Motivates staff to perform: Most people like being able to get on with their work with minimal management intervention. It allows them to make decisions, try new things that produce better outcomes, and helps them to “own” their task areas.

Disadvantages of Management by Exception

It’s only as good as the system: All four steps of the system must be carefully handled. For instance, if you decided that a 6 percent deviation is significant, but in reality, a 4 percent deviation will have grave consequences, you’ll miss your chance to intervene before the damage is done.

Needs detailed monitoring: Without automated monitoring systems, there’s going to be a lot of manual data collection and reporting. That costs time, and time costs money.

Managers must be problem solvers first and foremost: Problem-solving abilities are essential for good management, but sometimes, the manager may not have all the answers. Frontline staff may already know what to do, but because they must consult their managers about deviations, management by exception can even delay problem-solving.

It’s reactive: If you adopt management by exception in its purest form, you are only reacting to problems. What about pro-actively working to prevent them from occurring in the first place?

Tallyfy and Management by Exception

When it comes to managing and monitoring workflows, Tallyfy is the ultimate tool for businesses. It’s not just a matter of allocating work and passing it from hand to hand until it’s finished. You can use it to check performance in real time, and analytics features allow you to look for the source of exceptions you may see.

Management by exception means that your staff has to be extremely organized and tasks have to be approached systematically. But even if you aren’t aiming for MBE in its purest form, being systematic and organized is a great way to improve efficiency. And since deviations are easy to spot, it also provides an excellent platform for trying new systems that could have far-reaching implications for the overall productivity of your business.

Soon, you’ll be setting new benchmarks based on your improved performance, so why not schedule a chat or sign up for your free trial today?

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