By Kurt Peters
One of the biggest issues that confronts chain retailers is employee honesty.
Most employers realize that no matter how closely they screen prospects, they
will end up hiring a few dishonest employees; the odds favor that outcome in
a pool of several thousand people. And so the challenge becomes how to spot
those who are dishonest, alert the opportunistic thieves who are basically honest
to the fact that there’s a chance of getting caught, and not implement procedures
that will disrupt the company’s primary job of selling merchandise. On top of
all that, retailers are cautious about not overloading their IT infrastructure
to catch a few thieves.
To address those concerns, some retailers are adopting web-based tools that
can move a lot of data inexpensively to an analysis program and make results
of the analysis available to loss prevention managers, store managers and others
at any time, any place, at a low cost. “The web is our access point to the database,
all we need to get at all the information we’ve gathered in there is a browser
interface,” says Peter Gerhardt, vice president of finance of Toronto-based
Town Shoes Ltd., which operates 64 stores with 1,200 employees across Canada
and uses the FraudWatch technology from Triveristy Inc.
A buried paper trail
In spite of advances over the past few years in technology that makes it easier
to catch thieves, employee theft continues to be a major problem at retail companies.
The latest National Retail Security Survey from University of Florida researchers
reports that for the second year in a row, employee thefts hit a record level.
Preliminary results show that shrink—the term for unaccountable losses of all
kinds—reached $31.3 billion in 2001. The employee portion of that accounted
for $15 billion—48% of all losses. The next highest category was shoplifting,
which cost retailers $10 billion and accounted for 32% of losses. Following
were losses due to paperwork errors, 15%, and theft by vendors, at about 5%.
With employee
dishonesty accounting for the biggest portion, it makes sense to tackle that
aspect first, analysts say. And with credit card and debit card fraud being
the most likely area where employees can steal a lot, it makes most sense to
start there. That’s where Town Shoes began after it installed a FraudWatch web-based
system from Toronto-based Triversity. “We found—not unexpectedly, but disappointingly—that
our employees were stealing from us,” Gerhardt says.
The most common type of theft the company uncovered was the reversing of transactions
and crediting the sale amounts to an employee’s own credit card. It’s not a
terribly sophisticated type of fraud—in fact, it leaves a most incriminating
paper trail—but employees were getting away with it because the volume of transactions
kept loss prevention managers from conducting in-depth analyses of transactions
to try to spot fraud. Each of Town Shoes’ 64 stores processes 200 transactions
a day for a total of nearly 13,000 each day.
Working with Triversity, Town Shoes loaded six months of transaction log files
into FraudWatch. It then sorted refund transactions by card number and dollar
amount. “We dug into the database to see if we had supporting sales transactions,”
Gerhardt says. “If you find unmatched sales, you know you have a problem.”
A policy breach
Town Shoes found what it suspected it would find: On the first pass it identified
four people who were giving themselves refunds. “They figured they could take
a bona fide sale and give a refund to their own card and they’d never get caught,”
Gerhardt says. “And they were probably right. There is no way we would have
caught people if we had had to move and process all the data manually.”
After the success with credit card and debit card fraud, Town Shoes turned
to what’s known as cash post voids, in which a clerk simply voids a transaction
rather than issues a refund, then pockets the cash. Again, it spotted dishonest
employees pretty quickly, including one who had taken $5,000. It has identified
as many as five other employees who were stealing via cash post voids. “If you
have one person in each store doing $5,000 in cash post voids, that quickly
becomes a real number,” Gerhardt says.
Town Shoes identified cash post voids as a problem, but the FraudWatch system
was not written in such a way as to isolate cash transactions, says Martin Seaton,
Town Shoes controller. Rather, it reported all voids—cash, credit or debit.
To get to the cash voids, loss prevention staffers sorted on voids, then copied
all voids and exported the data to a Microsoft Excel spreadsheet, then sorted
the data further to identify cash voids. From there, they were able to further
sort the data by date and store, which uncovered the patterns they were seeking.
Cash post voids should be caught by managers who are following company policy
and reviewing all such transactions daily, Gerhardt says. But the investigation
of cash post voids uncovered another problem that was easily solved as a result
of having the data: Store managers were not reviewing all voids. “This gave
us something we could use in pointing out to managers that they were not complying
with company policies,” Gerhardt says.
Any time, any place
While such information could be collected and disseminated without the Internet,
the web makes the job easier and more timely, Gerhardt says. For one thing,
the web allows Town Shoes investigators to know exactly what is happening while
it’s happening. And the web gives them access to the information on a real-time
basis in such a way that store personnel may not know what’s happening. “This
can be done from any laptop,” Gerhardt says. “So if someone is in a store and
needs access to records, they can pull it down from their own laptop.”
Town Shoes has not computed its payback yet on the Fraud Watch technology.
“The payback will be significant in terms of deterrence,” Gerhardt says. Town
Shoes pays $75 a month per store—$4,800 a month total. At nearly 400,000 transactions
a month, the fee is equal to about 1.2 cents per transaction. “I assume that
for every one we catch, we’ll deter another four or five,” Gerhardt says.
Blazing a trail
Gerhardt says training of personnel to use FraudWatch and even to find ways
to manipulate data in ways that FraudWatch initially did not support was not
difficult. “It works almost straight out of the box,” he says. And, as the cash
post voids problem indicates, he says, “It’s flexible enough to do what you
want.”
Town Shoes is not alone in its adoption of high-tech loss prevention techniques.
It is not even alone in its use of the web to deal with loss prevention; many
retailers are using web-based closed-circuit TV monitoring of stores and reporting
of alerts from alarm systems. But it is blazing a path in moving data over the
web from stores to an analytics program and then back to loss-prevention managers
both in the stores and at headquarters to do something with the data. Others
are following quickly, says Addison Chan, vice president of loss prevention
and ASP solutions at Triversity. “We’ve added dozens of clients in the past
two years for credit and debit exception reporting through the FraudWatch product,”
he says.
kurt@verticalwebmedia.com
