As if retailers didn’t have enough to worry about, shrink continues to weigh down on their financial performance. For many, inventory loss is even growing.
The National Retail Federation’s (NRF) 2017 National Retail Security Survey, prepared with the University of Florida and Appris, describes the state of retail security for U.S. retailers in the 2016 fiscal year. Many of the conclusions paint a dire picture:
- U.S. retailers average shrink rate edged up to 1.44% in 2016 from 1.38% in 2015. Extrapolate this percentage across total U.S. retail sales, and you get a whopping $48.9 billion of preventable retail losses.
- Shoplifting, including organized retail crime (ORC), was once again the biggest single cause of shrinkage (36.5%), closely followed by internal losses/employee theft (30.0%). Interestingly, the share of administrative and paperwork errors jumped from 16.8% to 21.3%.
- Although losses continue to grow, retailers are spending less, not more, on loss prevention (LP). No fewer than two-thirds of retailers reported that their LP budgets are either flat or falling – even as they indicated that they need more LP staff, not least people with expertise in analysis and investigations, to keep pace with shrink’s drain on earnings.
You don’t know what you don’t know – including whether or not to outsource LP
Retailers face a variety of LP challenges. Some of the ones we often see are:
- The inability to quantify shrink, analyze loss drivers or explain variances
- No benchmarking of own shrink compared to comparable, best-in-class or worst-in-class companies
- Lack of actionable performance reporting and predictive tools that enable management to make timely, informed decisions
- No expertise to craft and execute a comprehensive LP strategy
- Uncertainty regarding LP staff skill levels; high turnover among LP personnel
Regardless of whether these challenges are strategic or tactical, analytical or operational, the bad news is: like all of us, retailers simply can’t know what they don’t know. Against this backdrop, it’s no wonder that the value of outsourcing LP services can also be difficult to evaluate.
No major retailer would outsource all LP, but many do outsource parts. The very largest retailers do practically everything on their own, but even they outsource some specialized services. For many others, deciding what to have in house, and what to outsource, is a key question.
We believe asking the right questions gives you a head start on finding the right answers. So, here’s our list of key questions retail managers must ask before outsourcing loss prevention services.
- Do we need to tap into specialist LP expertise?
Except for the very largest corporations, most retailers have some but not all LP competencies in house, and need to tap into specialist expertise on occasion, since their LP partners, on the other hand, have comprehensive sets of LP competencies, including both generalists and specialists, working full-time.
For example, all retailers produce their own periodic status reports that look back in time to quantify shrink that has already occurred. Few, however, are able to apply predictive analytics to spot emerging shrink trends across multiple locations and inventory categories, and produce actionable predictive loss indicator reports that enable managers to nip future losses in the bud.
Why this difference? Status reports require reliable data and some simple arithmetic skills – something all companies can handle. Predictive loss indicator reports, on the other hand, require more advanced statistical techniques, such as regression analysis, to tease out causal relationships between many independent variables – something only experienced statisticians can handle.
Specialist LP partners have experience with best practices from multiple companies in multiple industries, enabling them to transfer knowledge that might take the retailer years to acquire into effective remediation strategies – sooner rather than later.
Finally, specialist partners typically have a deep bench of expertise. They can provide dedicated skill sets that meet the needs of specific initiatives, so companies can complete these successfully without hiring more full-time employees (FTEs) to cover gaps in internal skills.
- Do we need to implement an LP project quickly?
Sometimes, the need for speed takes precedence over everything else, and there is no time to recruit or develop the necessary LP talent internally.
This might be due to acute problems that require management to stop the bleeding ASAP, for example:
- Identification of root causes of losses that are too significant to deal with later
- Immediate field support due to LP staff turnover or reductions
- Quick visits to multiple locations to enhance LP visibility and enhance the “impression of control” throughout the enterprise
In other circumstances, rapid deployment of additional LP resources might be necessary to complete LP due diligence processes for mergers and acquisitions – or in connection with internal and compliance audits.
Whenever LP projects require fast implementation, outsourcing can be important to meet requirements.
- Are flexibility and scalability in LP resources important?
Retailer’s need for LP expertise might be as seasonal as their sales. For many, when the holiday rush is at its greatest, it’s all hands-on deck and then some. For others, summer is crunch time. Marketing promotions also create spikes – or at least they’re intended to. In cases where seasonality makes the demand for LP resources high in some months and low in others, outsourcing and co-sourcing can provide staffing flexibility that may be an attractive alternative to adding FTEs.
Scalability – both upwards and downwards – might be important for other reasons, too. These could include expansion or contraction of the number of outlets, changes in geographical locations, temporary projects, reorganizations, and a host of other factors.
- Do we need to reduce LP costs?
Whenever retail’s top line goes down (whenever Amazon’s share price goes up?), cost savings are in focus. And as everyone knows, most retailers are taking an increasingly hard look at all costs – including those associated with loss prevention.
This might seem paradoxical given the findings of the NRF’s most recent survey, cited above. The survey reports that U.S. retailers lose an average of 1.44% to shrinkage, or $14.4 million per $1 billion in sales: that’s a lot of potential savings. The same survey reports that the average LP team per $1 billion in sales counts 43.6 employees – but would need another 6.9 staff to be successful. Nonetheless, the survey states, fewer than one in four retailers plan to increase hiring.
This aversion to headcount increase, despite its potential to more than pay for itself, seems curious at first glance. And we think it could be reasonably challenged in many cases.
But as is drilled into many managers, increased staff can also be seen as an increased liability. The actual costs of an employee (“fully burdened labor costs”) can be 50% or more than annual salaries once benefits, insurance, bonuses and all the rest are calculated in.
Outsourcing can sometimes be an attractively transparent alternative to adding headcount. Fixed costs become variable, and you pay according to your actual need and usage, not according to your staff levels.
One size doesn’t fit all
Depending on how you answer these questions for your company, outsourcing some LP services might make sense. If you answer “Yes” to most or all of them of them, it might make a lot of sense.
But it’s important to remember that one size never fits all. The pros and cons of outsourcing professional services can be complex and vary considerably from company to company. We hope this blog at least raises some of the most important questions!