Management by exception (MBE)

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.

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

1. 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 cant 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 for costs and targets for turnover and
profits, you can use them to monitor progress.

2. 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
youll pick up deviations, investigate them, and address them.
 3. Analyzing your deviations

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

There was no significant deviation. In that case, theres no need for further
action.
One or more deviations are significant. If you reach this conclusion, its 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 youre 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.

4. Resolving Exceptions

Now that you know what performance criteria have not been met or have been
exceeded and why it happened, its 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.