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Management by Exception: What is It and How Does it Work?

March 20th, 2023 (Updated 03/21/2023) | 9 min. read

By Gabriel Smith

As companies strive to remain flexible in their offer to clients to maintain a competitive edge in the marketplace, creating space for exceptions to the operational norms will be an inevitable byproduct of these efforts. When decision-making delves into nonstandard territory, companies should be armed with the right framework to address exceptions efficiently and systematically – without compromising core objectives.  

This is where adopting a solid Management by Exception (MBE) strategy can help. 

Here at Pricefx, with over 10 years’ experience helping businesses simplify their pricing with cloud-native pricing software, we understand that pricing management is not a task that can be undertaken by a few individuals alone, especially with a diverse product line and countless pricing levers to consider.  

In highly complex industries such as pricing, 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. In this article, we’ll explain what management by exception is and what it looks like before outlining best practices for managing by exception and its pros and cons. 

First, let’s take a quick look at what MBE actually involves and what it looks like in practice.  

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.  

How MBE Is Used in the Real World  

In what kinds of situations would an MBE framework help an organization most? Essentially, any time a company has a high volume of operational or financial events with daily variability.  

Imagine a complex product hierarchy, similar to how a tree is partitioned off into its many branches, which is divided into several categories, underneath which you have 5-10 product families with between 1,000-10,000 products each. In situations like these with a highly diversified product line, an individual approach to those 50,000+ cases will prove to be a nearly impossible task. 

Instead of handling these 50,000+ cases individually, which is both time-consuming and error-prone, you can assign policies for specific groupings in that tree. You may decide now to set all of product category 1 at a 20% gross margin, as well as establish hierarchical rules which would drive workflow in cases of any deviation from that threshold. To manage these exceptions, you would give sales representatives the ability to accept anything between a 15-20% margin and then pass the responsibility on to higher authorities in the organization (for example, to the pricing manager and then to the director) as the margin is compressed further.  

To offer another example, consider a playbook a procurement teams might use to negotiate contractual items like payment terms. While the customer may request concessions like extended payment terms of 60-90 days, the team recognizes that this request deviates from the 30-day standard. In situations like these, an organization using an MBE approach would set up a multitiered policy that allows its sales representatives the delegation of authority to sign off on a 60-day payment term exception themselves, with longer payment terms to be dealt with by higher-level executives.  


In both examples, management employs MBE strategies to not only empower their teams to handle items within a pre-agreed range of exception themselves, but also cut the approval cycle in half and save their efforts for higher-impact exceptions.

The logic of management by exception described here, in this case in the context of pricing management, can be applied to any processes carried out in a hierarchical structure. How a company stratifies its members, with its C-level executives at the top followed by management and their direct reports, or how a government enforces its laws first at the federal level and trickles down jurisdiction to the state level, follows the same premise that different decisions should be made at different levels according to their distinct delegations of authority.  

How to Manage by Exception: Best Practices and Pros & Cons 

There are a few factors you will need to decide upfront to implement MBE successfully in your organization. We recommend taking these best practices into account to get your MBE running as efficiently as it should.   

 Best Practices to Guide Your Management by Exception Framework 

 1. 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.  

2. 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.  

3. 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.  

 4. 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.  

5. 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.  

Management by Exception – A Strategy to Support Your Pricing Processes   

Adopting a robust management by exception strategy can help companies achieve a more agile approach to rapidly-evolving client requirements – and in the current economic landscape, it is crucial to avoid falling behind. By using MBE to streamline business processes and set up exception governance across hierarchical lines, companies can expect more gratifying, smarter decision-making that is in line with their strategic goals.  

Convinced management by exception is the right option for your organization and want to learn about more pricing-specific management strategies? Consider checking out our article below on building a comprehensive pricing strategy, or to find out how well your current pricing strategy holds up with our article on the ways to know if your pricing strategy is working.   


Gabriel Smith

VP Global Account Strategy & Chief Evangelist , Pricefx

Gabriel Smith is the VP Global Account Strategy & Chief Evangelist at Pricefx. He has more than 20 years experience in CPQ, enterprise software, SaaS, with particular expertise in lead to order, pricing, incentives, product management and solution sales. He has worked with market leading companies like 3M, Anda, Avery Dennison, Cisco, CertainTeed, Cox, IBM, Seagate, and Sonoco to improve their profit and processes through digital transformation of their pricing and CPQ processes and using AI to optimize pricing. He is a father of 2, attended UC Berkeley and lives in San Francisco.