What Does ‘Management by Exception’ Mean? How Does It Work?

Management is a very significant function in any business organization. All the departments of a business entity will collapse if there is no systematic managerial approach. Therefore, managers at different scales are very crucial to the success of every department and organizational success as a whole.

Different management approaches and management styles are adopted across varying business entities. The type of management style or styles employed by the organizations depends on business nature, requirements, and strategic vision. The most popular management styles include authoritative management style, visionary styles, transactional styles, etc.

Management by exception is also one of the management approaches with a unique orientation of project management, business intelligence management, and general business management. In this article, we will talk about management by exception and how does it work.

What is Management by Exception?

Management by exception can be defined as,

A management approach focuses on managing business performance by analyzing any deviation from the expected outcomes. In other words, the managers focus on the business operations that show a notable and significant deviation from the planned or budgeted performance.

We can formally define ‘management by exception as,

‘Practice whereby only the information that indicates a significant deviation of actual results from the planned or budgeted results is brought to management’s notice.’

The applications of management by exception are extended to all business areas. Similarly, it is applied in budgetary controls, financial matters, production lines, accounting, and strategic goals achievement. The ‘management by exception’ is a classical management approach.

The classical management approach was initiated in 1900, focusing on production rather than human power. In other words, this management style believes that employees’ motivation is increased with economic incentives and vice versa. The implications of the classical theory are also widespread in other managerial areas of business organizations too.

What Are the Basic Principles Behind this Management Approach?

Every management approach stands on some basic principles that describe when the approach can be best used in an organization. Similarly, the management by exception or MBE guides the managers in day-to-day activities, decision making, and strategic goals deviation. Therefore, certain core principles must be there to implement the management style. So let’s discuss the basic principles that should be kept in place for the management style to work effectively.

Systematic Approach

How do we define a systematic approach in this case?

Every management style needs a systematic approach to work in the right direction. However, the emphasis is far greater in the case of MBE. It implies that the organization must have a clear set of operating standards and procedures. The standards and procedures guide the identification of deviations, their remedies, and corrective actions.

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In other words, there must exist a framework of how the deviations will be identified, measured, compared, and rectified. A systematic approach can be guaranteed by taking the following steps in due regard:

  • Analysis of operational needs and requirements
  • Creating a well-defined set of standards
  • Collection, classification, and interpretation of reports based on the standards
  • Final decision-making on pre-determined requirements.

For instance, you must set your organization’s priorities about which deviations are troublesome or raise points of concern. Afterward, the data collection and analysis procedures are defined. As a result, management can measure and rectify the deviations.

A Concrete Organizational Policy

Why need a concrete organizational policy?

This point relates to the systematic approach of management. We discussed defining clear standards and procedures. The policy of an organization is a pre-determined and pre-established set of rules and regulations. A policy defines the objectives, policies, and regulations that an organization’s operational units and departments must follow.

A good policy has very well-defined accountability. The rules and regulations across all levels of management are pre-defined, and all individuals follow the same rules.  Therefore, the organizational policy must be very well-defined and in integration with the systematic approach of management.

Clear Definition of Exceptions

We talked about the organization’s priorities related to the deviations. So, in this principle, an organization’s management must understand, define, and develop the definition of exceptions. For instance, a deviation in one organization might not be material for another organization.

For instance, company A has a budget of 2,000 USD, and company B has a budget of 20,000 USD. On analysis, there was a deviation of 1,000 USD in the budget of both companies. For company A it is an alarming point that budget has deviated by 50%. However, company B won’t consider it alarming as its budget deviation is only 5% of the planned budget.

In short, if the management has a better understanding of exceptions and clearly defined points of concern, it will be easy to locate any deviation and rectify it on time. This principle also implies that there should be a clear understanding of the organization’s routine and exceptional activities.

How Does It Work?

Let’s understand how does the process of ‘management by exception’ works in any business entity. There is a process flow for ensuring that management by exception is meeting the required standards and output is the required results. The whole process works in loops, and each loop is directed to the next one.

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Step 1: Measurement Phase

All the data related to business operations from different operating units and departments is calculated in the measurement phase. The next part of this phase is evaluation of the data that includes:

  • performance measurement by comparing the inputs with the outputs. The outputs are compared with the level of organizational goals achievement.
  • Analysis of how the financial resources have been used to produce goods or provide services for profit generation
  • Wastage of resources and economies of scale in procurement, storing, and logistics management.

All the information is processed into quantifiable figures that can be compared in the later stages of the process.

Step 2: Projection Phase

The next phase in the process is the projection phase that focuses on analyzing different measurements used for fulfilling organizational goals and objectives. The historical data is also used to prepare the projections, and statistical approaches are applied to the projections. For instance, the reliability, confidence, standard deviation, correlation, sample size, and probability of different measurements is appropriated.

The information derived in the first step of the second phase is used for budgeting and forecasting. The strategies of the business are examined to see if there are enough resources to perform the operations. If any inadequacy is found, the management amends the plans and strategies.

Step 3: Selection Phase

The projection phase has been completed, and the management has different plans in hand to achieve business goals. The selection phase is all about screening the plans and choosing the most suitable one. According to the plan selected, the organization procedures and system are adopted.

Step 4: Observation Phase

Now, the management plan has been selected, strategies are in place, and implementation has started. The management will observe the performance on a periodic basis. As discussed above in the principles, the system and policy of an organization must be automatic, reliable, and adequate to observe all necessary aspects of performance.

Step 5: Comparison Phase

When the comparison phase arrives, the business’s actual performance is compared with the planned roadmap or budgeted performance. The deviations from the planned performance are identified in this phase. These deviations are categorized as major, minor, or negligible deviations.

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Step 6: Action Phase

The comparison stage is like a reflection process when the management is reflecting on performance. The last stage is the action phase when the identified deviations are rectified. The rectification is made by implementing strategies in different departments and organization units. This phase aims to make sure that the performance of a department or project is meeting the optimal level.


‘Management by exception’ has many advantages and pros for a business entity. Some of these advantages are as follow:

  • The management time and focus can be utilized in more important areas of business development. The workforce has not always to keep an eye on how the performance is doing.
  • As soon as deviations are identified and highlighted, the action plan is there to rectify them. Therefore, this approach has a rapid response to problematic areas.
  • The staff has higher motivation levels in their work due to negligible intervention of the management. They have the freedom to decide and act within the prescribed delegation of authority and standards.
  • Past trends and historical data can easily be compared with the current scenario.
  • The approach is a mix of qualitative and quantitative data analysis that brings a unique orientation to achieve business goals.


There are certain limitations of this management style too.

  • The process might become too vague if the basic principles are not followed properly.
  • The projections made for the business goals are made by using historical data. There might be a major change that has changed the future trends. The reliance on past data can create problems in decision-making.
  • The scope of the management style is very extensive and requires detailed understanding, observation, and reporting procedures to identify every material deviation from the budgeted or planned outcomes.
  • The human behavior deviations are out of the scope of MBE. Therefore, this management style cannot be used as a whole as humans are a significant part of any entity.
  • The automated system won’t beep the alarm until the deviation has actually occurred. Therefore, the management cannot act in anticipation.


Management, by exception, is a useful management style that can solve many problems of a business entity. However, this management style is more appropriate for departments or operational units where deviations are common and material.

For instance, finance is an area where the deviation from the planned performance can raise serious concerns. Similarly, the measurement of deviations in the production department is also significant.