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Management by Exception: Definition, Principle & Examples

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  • 0:01 What Is Management by…
  • 1:02 How Is MBE Implemented?
  • 2:40 What Are the…
  • 3:10 What Are the…
  • 3:46 Lesson Summary
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Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

Management by exception is a way of separating tasks between staff and management. Watch this video to learn how tasks are separated and the advantages and disadvantages of managing a business this way, then test your knowledge with a quiz.

What is Management by Exception?

Management by exception (MBE) is a practice where only significant deviations from a budget or plan are brought to the attention of management. The idea behind it is that management's attention will be focused only on those areas in need of action. When they are notified of variance, managers can hone in on that specific issue and let staff handle everything else. If nothing is brought up, then management can assume everything is going according to plan.

This model is similar to the vital signs monitoring systems in hospital critical care units. When one of the patient's vital signs goes outside the range programmed into the machine, an alarm sounds and staff runs to the rescue. If the machine is quiet, it's assumed that the patient is stable, and they will receive only regular staff attention.

How is MBE Implemented?

If a company is going to implement MBE, they need to first set up a basic framework that will identify items that vary from plan to plan. These are the critical things that must be in place to make MBE work:

  1. An appropriate budget to measure performance against. This budget must be designed well so that the business will meet its strategic objectives if everyone conforms to the plan.
  2. A matrix of exception amounts and who will be notified. The degree of variance allowed in different categories in the budget needs to be defined in advance, along with the appropriate levels of management who will respond to the variance in question. In some cases, different levels of variance will be brought to the attention of different levels of management. For example, a $5,000 variance might be reported to a department manager, while a $50,000 variance is brought to the attention of the functional V.P.
  3. A timely and accurate reporting system. Information needs to be accurately captured and compared to the overall budget on a regular basis. Exceptions need to be noted so that information can be sent to the correct team members.

Once these items are present, the process can be rolled out to all staff. Anything that falls outside the budget by an amount as defined in the matrix of exceptions will be sent to the appropriate level(s) of management for review and action. Otherwise, staff is in charge of decision making.

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