With staff theft and operational irregularities costing retailers £4bn a year, Liz Hamson looks at how effective processes and new technology can stop money ending up in the wrong hands
It sounds unlikely. But such incidents are not uncommon, admits the security manager from the chain that Sandra worked for. And alarmingly, senior members of staff are just as likely to be on the take as shop floor staff, she says, citing the store manager who stole £60,000.
Total UK retail loss stands at £4bn a year, according to the European Retail Theft Barometer. In the grocery sector, that equates to 0.83% of sales and a staggering 25% of profits, says the Centre for Retail Research. And half to two thirds of that loss -- be it through deliberate theft, wastage or simple human error -- is thought to be staff-related.
Consultant John Davison, vice president and research director at Gartner G2, agrees: “The big issue is that retailers overestimate theft, whether by customers or staff. They are only just beginning to realise that the real problem is poor processes.”
Take Sandra’s story. In-store security failed to pick up discrepancies on the customer services desk because it was not looking for any. Her illicit activities only came to light when the number and size of refunds going through raised suspicions.
Sandra had taken advantage of a weakness in the system and the general reluctance on the part of the powers that be to confront the issue of internal fraud.
Yet, says Kirmani of the perpetrators: “The better they understand how to manipulate the system, the better they understand how you are trying to prevent them. They adapt and change and they take advantage of every weakness.”
While Sandra’s story is not unique, most fraud occurs on a smaller scale. The problem is that there is a lot of if. “It is endemic,” admits the security manager. “You get intelligent college kids on the till and they almost see it as a challenge.”
One day, a customer services manager - let’s call her Sandra - decides to put through a fraudulent refund while things are quiet. It’s a perk of the job, she reasons, and in any case, it’s just a one-off. Nobody spots her. So the following week she tries once more. Again she gets away with it. Before long this has become a regular habit. She is only caught 18 months later, by which point she had pocketed a tidy £30,000.
Retailers tend to blame theft. Yet it is just the symptom of a much deeper problem. Khuram Kirmani, managing director of loss prevention specialist IntelliQ, says bluntly: “Fraud exists because of weak processes. The weaker your processes, the more susceptible you are to fraud and error.”
“She got greedy,” recalls the security manager. “We caught her on CCTV processing a refund when there wasn’t a customer there.
“She tried to bluff her way out of it by saying she was catching up with paperwork but she had £200 in her hand and £1,200 in her purse. When we looked, her bank account had £20,000 in it.”
Offences range from fraudulent refunds and unauthorised discounts for friends and family to voucher fraud and failing to scan high value items such as DVDs, CDs or expensive cuts of meat through the till.
Collusion with family and friends, or sweethearting as it is sometimes known, is a major issue,admit retailers. Argos security solutions manager Adrian Sherry gives the example of a manager selling camcorders at drastically reduced prices. “Other members of staff bought them - some innocently. Members of the public bought them. We managed to recoup most of the loss but only realised that there was a problem when we started to run short of stock.”
Professor Martin Gill, managing director, Perpetuity Research and Consultancy, adds: “I’ve been surprised at how often outside offenders collude with staff.”
Unfortunately, the problem extends beyond the shop floor. One former member of staff at a regional distribution centre admits that it was not uncommon for staff to steal certain items to order. “We’re only checked randomly,” he says, adding that there was a higher than average incidence of wastage. “If we wanted to eat something, we just opened the pack. Sausage rolls, pork pies and mini quiches were popular.”
Staff also collude with suppliers to perpetrate fraud. David Parker, former head of security at Safeway, says: “It’s a massive area. Where do you start? There’s distribution centre collusion with staff and double invoicing. You also need to bear in mind that in a lot of cases staff get threatened. Again we don’t know the extent of the problem.”
More often than not, however, there is no fraudulent intent. Kirmani says: “The view is that most loss is down to customer theft and that’s where the security systems are focused. Far more is lost internally and most of that is down to error and operational irregularities.” Retailers all too often fail to appreciate the full “landscape of loss”, says Kirmani. Yet, ECR Europe believes that process errors account for an incredible 71% of stock loss.
Introducing technology can help. IntelliQ is one of a number of companies that offer data mining software to analyse EPoS data and help identify anomalies as they arise. Sherry, who introduced its RetailKey LP solution after the camcorder incident, says: “Had we had it, we’d have been able to identify the problem within minutes and would have been able to save 11 and a half manpower days. One of the major benefits is that it is able to analyse data at stores that are perceived to be at lower risk as well as stores where we suspect there is a problem.”
Another piece of new kit comes from
SeeWhy, which has taken techniques used to detect anomalies with online transactions and applied them to EpoS data. Charles Nicholls, founder and CEO, says: “People take a long time to identify problems because the volume of data is too large. The traditional method is going through millions of database entries. We look at one transaction at a time, reducing the process to seconds. The system builds up profiles of members of staff and understands what is normal - that enables us to decide what signatures of fraud to look at more closely. The system generates an alert and action can be taken.” But it is not just a matter of deploying the right IT, says Kirmani. “You have to have a culture of loss prevention. You need to start by tackling fraud and then work your way out to deal with error, compliance and process and policy. Are they robust enough or do they give rise to fraud?”
At the moment, too often the answer is yes. Indeed, BRC figures show the level of staff involvement increased from seven in 1,000 employees in 2002 to nine in 1,000 in 2003 at an estimated cost of £282m to the retail sector as a whole.
If retailers are to reverse the trend, they need to introduce more effective staff training and encourage people like Sandra not to see theft as easy - or a perk. They also need to measure the scale of loss more accurately. Davison says: “Retailers need to return to the basics to determine the shape of the problem. There is no use tackling just one aspect of shrinkage. Technology will allow you to understand the problem better. But it is as much about discipline and management attitudes.”
With shrinkage amounting to 25% lost profits, it’s a no-brainer, says Kirmani. “It’s the last easy money on the table.”
It sounds unlikely. But such incidents are not uncommon, admits the security manager from the chain that Sandra worked for. And alarmingly, senior members of staff are just as likely to be on the take as shop floor staff, she says, citing the store manager who stole £60,000.
Total UK retail loss stands at £4bn a year, according to the European Retail Theft Barometer. In the grocery sector, that equates to 0.83% of sales and a staggering 25% of profits, says the Centre for Retail Research. And half to two thirds of that loss -- be it through deliberate theft, wastage or simple human error -- is thought to be staff-related.
Consultant John Davison, vice president and research director at Gartner G2, agrees: “The big issue is that retailers overestimate theft, whether by customers or staff. They are only just beginning to realise that the real problem is poor processes.”
Take Sandra’s story. In-store security failed to pick up discrepancies on the customer services desk because it was not looking for any. Her illicit activities only came to light when the number and size of refunds going through raised suspicions.
Sandra had taken advantage of a weakness in the system and the general reluctance on the part of the powers that be to confront the issue of internal fraud.
Yet, says Kirmani of the perpetrators: “The better they understand how to manipulate the system, the better they understand how you are trying to prevent them. They adapt and change and they take advantage of every weakness.”
While Sandra’s story is not unique, most fraud occurs on a smaller scale. The problem is that there is a lot of if. “It is endemic,” admits the security manager. “You get intelligent college kids on the till and they almost see it as a challenge.”
One day, a customer services manager - let’s call her Sandra - decides to put through a fraudulent refund while things are quiet. It’s a perk of the job, she reasons, and in any case, it’s just a one-off. Nobody spots her. So the following week she tries once more. Again she gets away with it. Before long this has become a regular habit. She is only caught 18 months later, by which point she had pocketed a tidy £30,000.
Retailers tend to blame theft. Yet it is just the symptom of a much deeper problem. Khuram Kirmani, managing director of loss prevention specialist IntelliQ, says bluntly: “Fraud exists because of weak processes. The weaker your processes, the more susceptible you are to fraud and error.”
“She got greedy,” recalls the security manager. “We caught her on CCTV processing a refund when there wasn’t a customer there.
“She tried to bluff her way out of it by saying she was catching up with paperwork but she had £200 in her hand and £1,200 in her purse. When we looked, her bank account had £20,000 in it.”
Offences range from fraudulent refunds and unauthorised discounts for friends and family to voucher fraud and failing to scan high value items such as DVDs, CDs or expensive cuts of meat through the till.
Collusion with family and friends, or sweethearting as it is sometimes known, is a major issue,admit retailers. Argos security solutions manager Adrian Sherry gives the example of a manager selling camcorders at drastically reduced prices. “Other members of staff bought them - some innocently. Members of the public bought them. We managed to recoup most of the loss but only realised that there was a problem when we started to run short of stock.”
Professor Martin Gill, managing director, Perpetuity Research and Consultancy, adds: “I’ve been surprised at how often outside offenders collude with staff.”
Unfortunately, the problem extends beyond the shop floor. One former member of staff at a regional distribution centre admits that it was not uncommon for staff to steal certain items to order. “We’re only checked randomly,” he says, adding that there was a higher than average incidence of wastage. “If we wanted to eat something, we just opened the pack. Sausage rolls, pork pies and mini quiches were popular.”
Staff also collude with suppliers to perpetrate fraud. David Parker, former head of security at Safeway, says: “It’s a massive area. Where do you start? There’s distribution centre collusion with staff and double invoicing. You also need to bear in mind that in a lot of cases staff get threatened. Again we don’t know the extent of the problem.”
More often than not, however, there is no fraudulent intent. Kirmani says: “The view is that most loss is down to customer theft and that’s where the security systems are focused. Far more is lost internally and most of that is down to error and operational irregularities.” Retailers all too often fail to appreciate the full “landscape of loss”, says Kirmani. Yet, ECR Europe believes that process errors account for an incredible 71% of stock loss.
Introducing technology can help. IntelliQ is one of a number of companies that offer data mining software to analyse EPoS data and help identify anomalies as they arise. Sherry, who introduced its RetailKey LP solution after the camcorder incident, says: “Had we had it, we’d have been able to identify the problem within minutes and would have been able to save 11 and a half manpower days. One of the major benefits is that it is able to analyse data at stores that are perceived to be at lower risk as well as stores where we suspect there is a problem.”
Another piece of new kit comes from
SeeWhy, which has taken techniques used to detect anomalies with online transactions and applied them to EpoS data. Charles Nicholls, founder and CEO, says: “People take a long time to identify problems because the volume of data is too large. The traditional method is going through millions of database entries. We look at one transaction at a time, reducing the process to seconds. The system builds up profiles of members of staff and understands what is normal - that enables us to decide what signatures of fraud to look at more closely. The system generates an alert and action can be taken.” But it is not just a matter of deploying the right IT, says Kirmani. “You have to have a culture of loss prevention. You need to start by tackling fraud and then work your way out to deal with error, compliance and process and policy. Are they robust enough or do they give rise to fraud?”
At the moment, too often the answer is yes. Indeed, BRC figures show the level of staff involvement increased from seven in 1,000 employees in 2002 to nine in 1,000 in 2003 at an estimated cost of £282m to the retail sector as a whole.
If retailers are to reverse the trend, they need to introduce more effective staff training and encourage people like Sandra not to see theft as easy - or a perk. They also need to measure the scale of loss more accurately. Davison says: “Retailers need to return to the basics to determine the shape of the problem. There is no use tackling just one aspect of shrinkage. Technology will allow you to understand the problem better. But it is as much about discipline and management attitudes.”
With shrinkage amounting to 25% lost profits, it’s a no-brainer, says Kirmani. “It’s the last easy money on the table.”
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