Magazine Article | August 1, 2003

Employee Theft Smackdown

Source: Innovative Retail Technologies

With annual shrinkage exceeding $30 billion, retailers are turning to LP (loss prevention) technology for answers.

Integrated Solutions For Retailers, August 2003

You don't have to be an LP (loss prevention) manager in a high crime area to know shrinkage is a major concern for retailers from all walks of life. According to the 2002 National Retail Security Survey, retailers experienced $31.3 billion in shrinkage during the 2001 calendar year. While many people believe shoplifting is the primary force behind this figure, the same survey revealed employee theft was by far the leading cause of retail shrinkage. Employee theft, which accounted for 48% of all shrinkage in 2001, was 16% above shoplifting, the second leading cause of shrinkage.

LP Traditionally Hampered By Price, Perception, Data Disparity
With corporate LP budgets averaging slightly more than 0.5% of sales, LP technology is only recently becoming a viable option for small- to mid-sized retailers. "Just eight years ago, it cost anywhere from $250,000 to $500,000 for an LP solution," says Cheryl Blake, VP of LP services for LP vendor Aspect Loss Prevention LLC (Bloomington, MN). "Today, LP solutions cost between $60,000 and $150,000 and have five times the functionality of their precursors."

Unlike other solutions a retailer may deploy, such as a loyalty program or a CRM (customer relationship management) solution, LP isn't designed to make revenue grow. Rather, it makes the bottom line more representative of the retailer's actual net income. Because it helps make a retailer more profitable by reducing costs rather than increasing revenue, some retailers haven't explored the value of an LP solution. With price points dropping and success stories rising, however, more retailers are taking interest.

Video Goes Digital, Enabling Remote Capture
In the past few years, a few changes to video technology benefited LP initiatives in a big way. A lot of retailers have long used some kind of video monitoring solution in their stores. Some mount cameras on the ceilings at strategic locations in the store while others take a more discreet, hidden-camera approach by placing cameras inside tinted-glass domes. Irrespective of the ways the cameras are displayed on the front end, the traditional method of capturing video has been via tape media. In the last few years, however, there has been a significant transition to digital video recording (DVR). Thanks to advances in digital video compression technology, retailers are now able to capture video and store it on a hard drive. With digital video, retailers don't have to manually change tapes. Instead, they can capture three or four months of data and store it all on a single computer drive.

"Digital video can be compressed and transferred over an IP [Internet Protocol] network, which gives LP executives the ability to view critical issues without having to travel to the store," says Craig Matsumoto, COO of LP vendor and outsourced service provider LP Innovations (Needham, MA). "Also, digital video can be integrated with exception-based reporting applications, which significantly helps close the loop on theft cases." For instance, exception-based reporting software may reveal that store employee Susie Q. has a high occurrence of post-transaction voids, which alerts the retailer the employee may be stealing money at the checkout register. With the use of a DVR solution, the employer no longer has to leave its suspicions to guesswork. If the checkout application and the video are integrated, the employer can match the moment a post sale void took place with the video captured at the same moment. The video will show, for instance, whether Susie Q. did a post-sale void with no customers at the checkout register.

Besides the benefit to LP programs, DVR systems can be used for training purposes. Operations managers, for example, can select a specific store within their companies' chains and view employee and customer activities remotely. Using this feature, a manager may notice employees at a particular store are not mentioning a specific company-wide promotion when assisting customers. Operations managers can immediately notify store managers and make sure employees communicate properly with customers.

Integrated Exception Reporting Improves Fraud Detection
In addition to the recent advances in DVR technology, exception-based reporting has also come a long way. One contributing point to this trend is that more retailers are bringing disparate data silos together - either by purchasing POS suites or by integrating applications using APIs (application program interfaces), middleware, or custom coding. In the same way a single repository helps retailers learn more about their customers, the same principle works for employees, too. "By integrating the time and attendance application with training, HR [human resources], and payroll, several new LP metrics can be rendered from the repository," says Blake. "For example, a cashier may be required to enter his employee ID before performing a post-transaction void. If the ID of an employee who is not at work is entered, an integrated system can alert a store manager [via pager or e-mail] that fraudulent activity is taking place." By integrating exception-based reporting applications with other retail applications, more exceptions can be detected and more fraudulent activity can be caught and stopped.

LP Program Awareness Yields Bigger Confessions
Through the use of integrated exception-based reporting and remote digital video monitoring solutions, retailers can combat shrinkage more quickly and more effectively. "By integrating applications, retailers reduce the amount of paperwork investigators require," says Blake. "This lessens the investigators' services and shortens the time frame from employee theft detection to prosecution."

Retailers are using LP solution awareness to help them place the final pieces of the puzzle - convicting and prosecuting employees. By posting signs where employees can see them and warning employees about monitoring their work activities, two benefits result. First, employee theft is reduced. "And, employees disclose more information about how much they've stolen if they are aware their activities have been captured by their employer," says Blake. "If they know their employer monitors their work activity, employees typically will confess twice as many theft incidents." This confession is key to the next step of the process, which is prosecution. Either a signed confession or a court conviction is necessary for employers to prosecute employees. Of the two options, one can readily see how the former is much easier and less expensive to obtain than the latter.

Technology Is A Supplement To Other LP Practices
LP technology is less than half the cost of what it was eight years ago and offers much more functionality. Yet, the retailers that are seeing the best return on their LP investments are the ones using the technology as a supplement to - not a replacement for - other tried-and-true LP practices. For instance, some retailers are enacting policies about bags brought into the store by employees. "Some retailers check 100% of the bags that come into or go out of the store," says Matsumoto. "Other retailers provide employees with clear plastic bags that are to be used for bringing items in or out of the store."

Other effective LP practices include cycle counting. Some retailers may target high-shrink SKUs (stock keeping units) to reduce labor costs. To do cycle counting, it is necessary to have a retail system that allows the retailer to have this level of control over its inventory.

EAS (electronic article surveillance) tags, which set off alarms when passed through EAS readers, are another way retailers can reduce theft. By requiring employees to pass through EAS readers on their way out the door and putting the EAS deactivation devices in open areas only, employees may think twice before helping themselves to company merchandise.

With a good LP program in place, retailers can expect an immediate reduction in store shrinkage. According to Matsumoto, it is common to experience shrinkage reduction of 20% to 40% in the first year. This translates to a three- to nine-month return on investment, which by just about any technology implementation standards is a real steal.