Management by Exception

Management by exception (MBE) is a way of separating tasks between staff

and management. Management by Exception is a practice where only significant deviations
from a budget or plan are brought to the attention of management. The idea 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 the 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.
Management by exception is a management system where business results are
compared against the results that were either budgeted or planned. Unlike other types of
management systems, management by exception means that management intervenes in daily
operations only if there is a deviation, or variance, between the actual results and the
planned results.
Minor deviations may be brought to the attention of low-level supervisors,
while huge deviations may be shot straight up to the top levels of management. This,
theoretically, allows managers to focus on the most pressing and important issues and
problems. For example, if productivity goals are being met, managers are busy dealing with
other problems rather than walking around the production floor monitoring activity.
A Crucial Tool: Variance Analysis
One of the most important tools used in management by exception is variance
analysis. Variance analysis is a process that is used to determine the variance, or difference,
between the actual results and the planned for results and the cause of the difference. In
other words, it's the technique used to determine whether there is a problem needing
management's attention when managing by exception.
Example: Let's look at a quick example of management by exception and the use of
variance analysis. Rakesh is an accountant that is responsible for tracking the production
costs for his company's production division, which produces toys. Rakesh's company has

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launched a new toy line. The cost per unit of production was budgeted during the beginning
of the project.
In reviewing the monthly invoices and receipts, Rakesh has determined that
the production division is 10% over budget on the new toy. Company procedure only gives
him authority to address overages of 5%, so he must bring this issue to his manager,
Mukund.
Mukund has the authority to investigate and address variances of up to 10%.
He investigates and determines that about a third of the variance was due to an unexpected
increase in the price of one of the commodities used in production. The other two-thirds of
the variance were related to price increases from some suppliers that are out of line with
market prices. Rakesh's manager meets with the company's purchasing agent to discuss
alternative vendors to correct the variance.

Advantages of Management by Exception

(1) It saves the time and energy of senior executives and enables them to concentrate on
more important problems and issues.

(2) It even provides the key to automation, for ordinary, routine matters can be handled by
an automatic machine while cases of exceptional nature can be left for human judgment.

(3) It facilitates the engagement of specialised staff for high-routine jobs.

(4) It reduces the frequency of decision making.

(5) It leads to the identification of critical problem areas.

(6) It stimulates communication.

Main Limitations of Management by Exception

(1) There is no single or set rule for separating routine matters from exceptional cases. This
task of separation may waste the time and energy of managers.

(2) It puts a kind of constraint on management development by keeping difficult problems

out of bounds for junior executives.

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(3) It breeds 'organisation man' thinking and suggests that the subordinate managers are
incapable of dealing with even problems of lesser complexity.

(4) It may degenerate into a system of management by crisis. But if a crisis is not handled at
the source, it may ultimately by too late for remedial action. This is particularly true of
labour problems.

(5) It generates a false sense of security leaving complex matters for the senior manager.

Management By Objectives:
A management system in which the objectives of an organization are agreed
upon so that management and employees understand a common way forward.
Management by objectives aims to serve as a basis for
(A) Greater efficiency through systematic procedures,
(B)Greater employee motivation and commitment through participation in the planning
process, and
(C) Planning for results instead of planning just for work. In management by
objectives practice, specific objectives are determined jointly by managers and
their subordinates, progress toward agreed-upon objectives is periodically reviewed, end
results are evaluated, and rewards are allocated on the basis of the progress.
The objectives must meet five criteria: they must be
(1) Arranged in order of their importance,
(2) Expressed quantitatively, wherever possible,
(3) Realistic,
(4) Consistent with the organization's policies, and
(5) Compatible with one another.
Suggested by the management guru Peter Drucker (1909-2005) in early 1950s,
management by objectives enjoyed huge popularity for some time but soon fell out of
favour due to its rigidity and administrative burden. Its emphasis on setting clear goals,
however, has been vindicated and remains valid.
Management by objectives can simply be defined as a programme that encompasses specific
goals, participatively set, for an explicit time period, with feedback on goal progress.

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Accordingly to Odiorne “MBO is a process whereby the superior and subordinate managers
of an organisation jointly identify common goals, define each individual’s major areas of
responsibilities in terms of the results expected of him, and use these measures as guides for
operating the unit and assessing the contribution of each of its members”.
MBO provides specific objectives for each succeeding level (i.e., divisional, departmental,
individual in the organisation). In other words MBO is a process by which objectives
cascade down through the organisation as shown in the figure below:

An MBO programme or process consists of four common ingredients. These are: specificity,
participative decision making, an explicit time period, and performance feedback.
1. Specificity: The objective in MBO should be clear and precise that can be measured and
evaluated. To state a desire to cut costs, for example, may not be enough. Instead, to cut
costs by 5 per cent will be more clear, exact and measurable objective.
2. Participative Decisions / Objectives: In MBO goals are not imposed on people. The
superior and subordinate jointly set objectives to be attained.
3. Explicit Time: Each objective is to be completed within a specific time period, be it three
months, six months or a year.
4. Performance Feedbacks: The final ingredient in MBO programme is feedback on
performance. It includes continuous and systematic measurement and review of
performance. Based on these Corrective actions are taken to achieve the planned objectives.

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Advantages of MBO: Following are the advantage of MBO:
1. The need to clarify objectives is stressed and suggestion for improvement is obtained
from all levels of management.
2. All managers have a clear idea of the important areas of their work and of the standards
required.
3. The performance of staff can be assumed and their needs for improvement highlighted.
4. Greater participation may improve morale and communication.
5. It makes individuals more aware of organisational goal.

Disadvantages of MBO: MBO suffers from the following disadvantages also:

1. It takes a few years to be effective.
2. Some companies always tend to raise goals. If these are too high, employees become
frustrated.
3. Appraisals are sometimes made on personality traits rather than on performance.
4. Some employees do not want to be held responsible and goals forced upon them may lead
to ill-feeling.

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