What is Management by Exception in PRINCE2 7?
Management by Exception
Have you ever asked yourself “What is Management by Exception in PRINCE2?”
If the answer is yes – this podcast episode is just for you:
Management by Exception is a fundamental principle within PRINCE2, a widely used project management methodology. Let’s delve into what it entails:
- Delegated Authority and Tolerances:
- In PRINCE2, a project is divided into different levels of management: the Project Board, the Project Manager, and the Project Team.
- Each level has specific responsibilities:
- Project Board: Decision-making authority.
- Project Manager: Management responsibility.
- Project Team: Delivery of project work.
- The concept of Manage by Exception revolves around delegating authority down the management hierarchy.
- Tolerances are predefined limits for project objectives (such as time, cost, quality, scope, risk, and benefit). These tolerances establish the boundaries within which each level can operate without escalating issues.
- When Does Manage by Exception Apply?:
- If everything is proceeding smoothly within the predefined tolerances, the Project Board won’t hear from the Project Manager unless it’s time for regular reports or stage completion.
- However, when an issue arises that falls outside the agreed tolerances (an exception), the Project Manager promptly sends an Exception Report to the Project Board.
- Examples of Tolerances:
- Let’s explore some examples of tolerances:
- Quality Tolerance: Suppose you’re creating a new mobile phone (let’s call it a GSM). You want the keyboard to function for an average user for 7 years, with a tolerance of ±5%.
- Scope Tolerance: The GSM project has mandatory requirements and additional “nice-to-have” features. The project can decide which “nice-to-have” requirements to include, but the mandatory ones must be part of the scope.
- Benefit Tolerance: Benefits resulting from the project (e.g., increased market share) must align with predefined expectations.
- Risk Tolerance: If a risk exceeds the set tolerance level (e.g., a critical component supplier cannot meet specifications), it becomes an exception.
- Let’s explore some examples of tolerances:
- Communication Flow:
- Manage by Exception ensures efficient communication:
- Project Managers handle day-to-day issues within tolerances.
- Exceptions prompt communication to the Project Board.
- The term “Manage by Exception” reflects the idea that the Board only needs to intervene when exceptions occur.
- Manage by Exception ensures efficient communication:
Remember, in PRINCE2, managing by exception means focusing on what truly matters and escalating only when necessary
Have you watched the video above? Good.
Now let’s look at a generalised (non-PRINCE2) model of implementing Management by Exception from a budget perspective across an organization:
Management by Exception: What is It and How Does it Work?
In highly complex industries, Management by Exception is one strategy to support more efficient business processes and delegate responsibility to address variance to the right people at the right time.
Management by exception is the practice of examining the financial and operational results of a business, and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount.
For example, the company controller may be required to notify management of those expenses that are the greater of $10,000 or 20% higher than expected.
The purpose of the management by exception concept is to only bother management with the most important variances from the planned direction or results of the business. Managers will presumably spend more time attending to and correcting these larger variances.
The concept can be fine-tuned, so that smaller variances are brought to the attention of lower-level managers, while a massive variance is reported straight to senior management.
Advantages of Management by Exception
There are several valid reasons for using this technique. They are:
Reduced review time. It reduces the amount of financial and operational results that management must review, which is a more efficient use of their time.
Efficient reporting system. The report writer linked to the accounting system can be set to automatically print reports at stated intervals that contain the predetermined exception levels, which is a minimally invasive reporting approach.
Allows employee initiative. This method allows employees to follow their own approaches to achieving the results mandated in the company’s budget. Management will only step in if exception conditions exist.
Triggers audit pre-reviews. The company’s auditors will make inquiries about large exceptions as part of their annual audit activities, so management should investigate these issues in advance of the audit.
Disadvantages of Management by Exception
There are several issues with the management by exception concept, which are as follows:
Wasteful variance analyses. This concept is based on the existence of, say, a budget against which actual results are compared. If the budget was not well formulated, there may be a large number of variances, many of which are irrelevant, and which will waste the time of anyone investigating them.
Extra corporate overhead. The concept requires the use of financial analysts who prepare variance summaries and present this information to management. Thus, an extra layer of corporate overhead is required to make the concept function properly.
Also, an incompetent analyst might not recognize a potentially serious issue, and will not bring it to the attention of management.
Supports centralized management. This concept is based on the command-and-control system, where conditions are monitored and decisions made by a central group of senior managers.
You could instead have a decentralized organizational structure, where local managers can monitor conditions on a daily basis, and so do not need an exception reporting system.
Assumes manager oversight. The concept assumes that only managers can correct variances. If a business were instead structured so that front line employees could deal with most variances as soon as they arise, there would be little need for management by exception.
What is Management by Exception?
Management by exception (MBE) is a management strategy in which an organization sets specific policies at different hierarchical levels that are then used by employees as a guide for decision- making.
MBE was developed to address the need for managers to focus on prioritized areas that require their attention, and delegate more “routine” tasks to lower-level employees.
Under this model, management will only intervene in major deviations from the standard operating or financial procedures, leaving the authority to manage the more minor exceptions to their direct reports.
This method prescribes a rule or set of rules for individual category or product families to be enforced; for example, a parameter for gross margin of a specific category of 20%.
Any scenarios which fall outside of these parameters should be passed along to a higher authority in the organization to be either accepted or rejected (note that the threshold to either accept or reject is also pre-defined and regimented along hierarchical lines).
Active vs. Passive Management by Exception
Both active and passive management styles exist in the MBE framework.
As these names suggest, active management by exception involves proactively working through problems to prevent bigger issues while passive management is a practice in which managers become involved only when there is a major issue.
So, while the premise of MBE suggests managers are mostly hands-off in their day-to-day interactions with their direct reports, the extent of their direct involvement can still vary significantly with this approach.
Best Practices to Guide Your Management by Exception Framework
- Define your standard procedures
To implement MBE effectively, you’ll need to establish standard operating procedures as a reference point for defining exceptions. For example, to categorize a 20% deviation from the target price as an exception, the organization would need to recognize that anything below that threshold is the norm and does not warrant the attention of management. - Determine how many approval levels you need
Whether it’s three tiers or five, the degree of granularity needed in your approval workflow for exceptions should mirror how your organization is normally structured and the complexity and impact of the exception being addressed. - Define the exception threshold at each approval level
An MBE system requires internal alignment on the exception range that each approval level responds to. That earlier mentioned 15-20% parameter for gross margin assigned to a sales rep’s realm of authority is a good example of this.
To set exceptions at the right thresholds, your business can take advantage of insights from its AI-driven systems, which pinpoint the optimal gross margin based on the target margin for a specific set of customers. When using data to drive your MBE framework, keep in mind this data will need to be accurate to support good decision-making. - Consider how the exceptions will be distributed across hierarchical levels
Once you have the basic framework in place, you should also consider how many deals you would like each authority level in your organization to worry about based on the business impact of that decision.
You can set a percentage of exceptional deals you want to cross a manager’s desk, the vice president’s desk, and so on. Perhaps only 20% will be assigned to the VP, 30% will go to a pricing manager, and the rest to the employees who are on the operational front lines. - Identify an ideal ratio of approval vs. rejection of exceptions
Deciding how many approvals are acceptable in a specific period of time is important namely because this practice maintains an exception’s status as an exception (as opposed to something which is freely given whenever requested without guardrails).
If your company approves or rejects an exception 100% of the time, it makes little sense to manage by exception.
If certain exceptions meant to be one-offs are granted enough times to start to eclipse the standard operating procedures set by the organization, that’s a clear sign that either a company’s MBE structure needs to be revised to match the market or its members need to be better briefed on the logic of that structure.
An 80-20 rule, which allows for exceptions to be granted 20% of the time, is generally a good rule of thumb, though your company may find a stricter or looser ratio to be more fitting depending on its business processes.
For example, a company with hundreds of thousands of events is not equipped to handle a higher percentage of exceptions and would benefit more from a ratio closer to 99% standardization of decision-making.
Advantages of MBE
• Less bureaucracy: Despite its bureaucratic appearance, MBE actually works to reduce red tape in an organization by requiring less organizational rules and regular interference from management to function.
• Efficiency in delegation: MBE supports efficiency by making better use of management’s time, enabling more value-driven decision-making across the organization.
• Independence in decision-making: Everyone is aware of their targets and their roles driving them, and uses this knowledge to respond to exceptional circumstances with a higher degree of autonomy.
Disadvantages of MBE
• Employee disengagement: While it can be empowering for some employees to resolve minor exceptions internally, MBE’s assignment of high-impact decisions to upper management can be demotivating for some more junior employees.
• Requires companywide buy-in: This model assumes full compliance by employees as a condition to work well, which in practice might not always be the case, and may cause internal disputes in the organization.
• Lack of foresight: Issues may come across management’s desk at a stage when the impact has already been felt by the business.
