Management by exception is a style of business management that focuses on identifying and handling cases that deviate from the norm. Management by exception has both a general business application and a business intelligence application.
General business exceptions are cases that deviate from the normal behavior in a business process and need to be cared for uniquely, typically by human intervention.
Their cause might include process deviation, infrastructure or connectivity issues, external deviation, poor quality business rules, malformed data, etc.
Management by exception here is the practice of investigating, resolving and handling such occurrences by using skilled staff and software tools. Good management can contribute to the efficiency of business processes.
Often in these cases, the process will be called exception management, as exceptional cases are not the sole focus of the managerial policy, and exception management (as opposed to management by exception) denotes a more moderate application of the process.
Management by exception (MBE), when applied to business is a style of management that gives employees the responsibility to make decisions and to fulfill their work or projects by themselves.
It consists of focus and analysis of statistically relevant anomalies in the data.
If an unusual situation or deviation in the recorded data appears, which could cause difficulties for the business and can’t be managed by the employee at his level, the employee should pass the decision on to the next higher level.
For example, if all products are selling at their expected volumes for the quarter, except one particular product that is underperforming or over performing at a statistically relevant margin, only the data for that product will be presented to the managers for further investigation and discovery of the root cause.
Management by exception can bring forward business errors and oversights, ineffective strategies that need to be improved, changes in competition and business opportunities.
Management by exception is intended to reduce the managerial load and enable managers to spend their time more effectively in areas where it will have the most impact.
Exception management also has an IT application.
When writing code, if the programmer sees that there will be an exceptional case where a predefined assumption of the application will be breached, the programmer will need to deal with that exception programmatically from the outset.
Advantages of management by exception
The main advantage of management by exception is that problematic issues are identified rapidly and managers can use their time and energy more wisely for important issues rather than for less important ones that could provoke delays in their daily operations.
Additionally, managers need to work less on statistics and the frequency of making decisions becomes less, which saves time. As managers take fewer decisions, employees have more responsibility, which increases their motivation.
The disadvantage of management by exception
Occurrences of mistakes in calculating budgets results in large variance differences and finding the errors can be time-consuming.
Furthermore, financial analysts responsible for calculation variances are increasing overhead costs of a company. If the financial analysts are not performing well, it will become a waste of time and money.
Another disadvantage is that only managers have power over really important decisions, which can be demotivating for employees at a lower level. Furthermore, the time taken for passing the issues to managers can be time-consuming.