Most companies document the “standard process.” The reality is that a significant portion of the business runs on exceptions to that process.
Custom pricing for specific customers. Non-standard payment terms. Procurement overrides. Approval bypasses. Manual workarounds. Ad hoc arrangements that exist because the standard process could not accommodate what the business actually needed to do.
The exception economy is invisible in the org chart, absent from the process manual and unmeasured in management reporting. But it is real, it is expensive, and it frequently represents the actual operating model of the company, as opposed to the documented one.
Measuring the Exception Economy
Customer exceptions: How many customers receive pricing, payment terms or service levels that deviate from the standard? What is the cost of administering each exception?
Procurement exceptions: How many purchases bypass the standard procurement process (pre-approved vendors, competitive bidding, standard approval limits)? What is the cost and risk of each bypass?
Credit exceptions: How many credit decisions deviate from the company’s stated credit policy? What is the default rate on exception-approved credit versus standard-approved credit?
Approval overrides: How many decisions are escalated past the designated approver to a more senior authority? What does this reveal about the appropriateness of the approval limits?
Manual reconciliations: How many reconciliations are performed because two systems do not communicate? What is the labour cost and error risk?
Process workarounds: How many standard processes have informal workarounds (a step that is officially required but routinely skipped, a manual intervention that compensates for a system limitation, an unofficial communication channel that bypasses the formal one)?
Each exception has a direct cost (the labour of the manual processing), a control risk (the override that weakens the control environment), a complexity cost (the customer-specific arrangement that the billing system cannot automate) and an information cost (the exception that is not captured in the management reporting, making the reported process metrics inaccurate).
In Northrop Management ’s operational and governance reviews, the exception audit reveals a layer of the operating model that management does not see because it was never designed. It grew organically, one exception at a time, until the exceptions became the process.
Ashish Chaudhary, frames the diagnostic directly: “The exception is often the true operating model. The documented process is the aspiration. A company that measures its efficiency against the documented process without measuring the cost of the exceptions is measuring a version of itself that does not exist.”
Questions for the Boardroom
- What percentage of our customer base receives pricing, terms or service levels that deviate from our standard?
- How many procurement transactions per quarter bypass the standard process, and what is the aggregate value?
- If we measured the total cost of all exceptions (labour, error correction, complexity, risk), what percentage of operating cost would it represent?
- Which exceptions have persisted for more than 12 months, and should any of them be absorbed into the standard process?
- Does our management reporting reflect the actual operating model (including exceptions) or the documented operating model (excluding them)?
Closing Implication
A company that runs on exceptions is a company whose actual operating model is undocumented, unmeasured and unmanaged. The discipline is not eliminating every exception. It is measuring them, costing them and determining which should be absorbed into the standard process, which should be formalised as approved variants, and which should be eliminated.
