It's difficult to be a customer-focused retailer these days if you're too busy worrying that your employees are stealing merchandise and money from right under your nose—and contributing to the $40 billion shrink problem that has slammed hard into U.S. retailers' profits in 2007.

Retailers surveyed by Retail Systems Research (RSR) are adamant in that belief, notes analyst Paula Rosenblum in a recent report. "They believe that their employees and customers are stealing merchandise and cash from them," she writes. "Ironically, the worst performing retailers are more concerned about employee theft than their peers."

But new technology tools can help the worst- and best-performing retailers keep an eye on employees who steal or give "sweetheart" deals to friends and family. Real-time business intelligence data can work hand in hand with such tools to make a big difference, industry analysts say.

In other words, IT has a real opportunity to help improve the bottom line for retailers when they need it more than ever.

One of the most disappointing earnings seasons in years has just passed, with many of the top U.S. retailers posting sluggish earnings and steep drops in profitability in 2007. Target, Home Depot, Lowe's, J.C. Penney, Sears and Kmart were just some of the notable retailers listed among the walking wounded.

During the 2007 holiday season, customers' satisfaction with retailers reached its lowest levels since 2001, reported the University of Michigan's American Customer Satisfaction Index.

Compounding the industry slowdown, most macroeconomic indicators still point toward more distress (a looming recession and layoffs, high gas prices and a depressed real estate market), which could cut further into consumer spending in 2008.

Though retailers can't cure the economy's ills, several in-house fixes could help next year's earnings, and IT can play a significant role in two of those areas: preventing financial losses from employee transaction fraud (giving "sweetheart" deals to friends and family at the cash register, for example) and shrink (lost, damaged or stolen merchandise due to outright employee theft or administrative error).

How much trouble do the companies face? A collection of survey data and industry-specific research estimates the enormity of retailers' shrink and fraud troubles at $40 billion in 2006.

Even so, many retailers still struggle with how to slay the shrink beast. "Shrink and loss prevention may hold a high priority in retailers' minds," writes Rosenblum in the survey report, "but these same retailers have difficulty turning thoughts into action."

The Source of Shrink

The largest source of shrink is the very people retailers entrust with the merchandise and the money: employees.