Photography by Michael A. Foley, ©2003 Rycus Associates Photography LLC

LossPrevention May – June 200325

By James Lee, Executive Editor

EDITOR’S NOTE: Leonard A. Schlesinger is vicechairman and chief operating officer of LimitedBrands. He also sits on the company’s board ofdirectors. In this capacity he is responsible foroperational and financial leadership, on anenterprise-wide basis, of the functions that supportthe operations of Express, Limited Stores, Victoria’sSecret Beauty, Stores, and Direct, Bath and BodyWorks, and the White Barn Candle Company.

Dr. Schlesinger joined Limited Brands in October1999 as executive vice president of organization,leadership, and human resources. Prior to hisappointment he served as senior vice president,counselor to the president, and professor of sociologyand public policy at Brown University (1998 - 99).Until October 1998 he was the George F. Baker, Jr.professor of business administration at the HarvardBusiness School and a member of the HarvardBusiness School faculty from 1978 to 1985 and 1988 to1998. He holds a bachelor’s degree in Americancivilization from Brown University, an MBA degreefrom Columbia University, and a doctorate inorganizational behavior from Harvard BusinessSchool.

Dr. Schlesinger’s academic research andorganizational consulting focused broadly on theareas of service management and organizationalchange. He is the author or coauthor of nine books,including his latest, The Value Profit Chain (Free Press2003), The Service Profit Chain (Free Press, 1997), andThe Real Heroes of Business…and Not a CEO AmongThem (Doubleday Currency, 1994) and has writtenover forty articles for academic audiences as well asThe New York Times, Fast Company, and HarvardBusiness Review.

E D I T O R : There are major changes underway at LimitedBrands throughout the corporation. Would you summarizesome of those recent initiatives that have taken place here?

S C H L E S I N G E R : This is a company that has recently markedits fortieth anniversary in the specialty retail business, which isan accomplishment in and of itself. We have been able tosurvive because we’ve been willing to change as the businessclimate changed. In the early ‘90s, we managed the transitionfrom “knock-off ” design and speed-sourcing to originalcontent, higher quality, branded goods and branded retailconcepts. To make that change we had to build new skills, newcapabilities, and add new talent to the organization. The endresult is that we have managed a process of enormouschange...in business strategy, in the talent agenda, in theorganizational agenda...all the while maintaining our relevancyto what the America consumer wants.

E D I T O R : How has this transition affected loss prevention?

S C H L E S I N G E R : We had a loss prevention model that waslargely rooted in the traditional security model of the ‘60s, ‘70s,and ‘80s. Over the last several months we have attempted toupdate that model and to shift its focus to one that is muchmore rooted in education, training, and support of ouroperating brands. This has required a fairly large talent shiftand a substantive organizational shift from a brand-based lossprevention activity to one that is now enterprise-based.

E D I T O R : Are you seeing results yet from this transition?

S C H L E S I N G E R : We increased our field coverage by over100 percent almost overnight without any increase in cost. Butin a larger sense, what we’ve been able to do conceptually atthis point is nothing short of amazing. The proof obviously will

Managing Changeat the World’s Most Admired

Specialty Retailer

May – June 2003 LossPreventionMagazine.com

be in the pudding. But the leadership of the loss preventionfunction has been quite willing to put their jobs, and theirmoney, where their mouth is, and to establish loss preventionand shrink targets inside the enterprise; the likes of which wehave never met before.

E D I T O R : The loss prevention function has been in yourpyramid of responsibility for a while, but you now have PaulJones, the vice president of loss prevention, directly reportingto you. What caused you to make that decision?

S C H L E S I N G E R : Loss prevention was a function thathistorically had not been top of mind with the line leadership ofthe organization. With the dramatic changes in the organization,I wanted to make absolutely clear to the enterprise that therewas no doubt about the nature and magnitude of ourcommitment going forward. From my perspective there was nobetter way to make that point than to put myself on the linealongside Paul. I have communicated every step of the way that[CEO] Les Wexner and I are fully supportive of the strategy, theprogram, the data that underlie it, and the loss preventionleadership team’s ability to carry it out.

E D I T O R : Paul has been here less than a year. In light of thechanges underway in the corporation, tell us about theprocesses that you went through in hiring a new VP of lossprevention.

S C H L E S I N G E R : I was convinced that I had an inadequateunderstanding of the function of loss prevention in the field. Iget your magazine and other magazines that I read, but I didn’tknow how much of it was the hyperbole of vendor-generatedpress releases and how much of it was real.

E D I T O R : We don’t publish vendor press releases.

S C H L E S I N G E R : That’s good. Coming out of academia, Itend to go to the Internet and do my own research. I keptrunning up against the Hollinger studies (National RetailSecurity Surveys conducted at the University of Florida,www.soc.ufl.edu/srp.htm). He seemed like a well-trainedsociologist with an academic appointment, but I didn’t knowhim from Adam. So I asked my staff to get him up here andhave him spend time with our senior management so we couldshare with him what we have, what we don’t have, what we’rethinking about, and to have him share from his own perspectivewhat the state-of-the-art is in the loss prevention industry.

We hired him as a consultant to help us noodle through this,recognizing full well that we needed to go outside of theorganization just to get our groundings. A large part of what wedid was translate his input into the broad elements of a go-forward concept for the function. Once we got to a point wherewe had alignment with the stores organization, then and onlythen did we go to the market looking for talent.

The vast majority of people would simply go to the marketand say, “I want a loss prevention person.” However, if we didn’tknow what we were looking for broadly, we could not haveaccurately assessed the talent that came through our door. Itwould have been just a personality contest, and we wouldinevitably have made the wrong choice.

I assumed whoever we hired would know the tactics of LP. Ithink I have enough appreciation at this point about thefunction to be able to delineate things that make sense fromthings that don’t, and how it all adds up. But I don’t perceivemyself or anybody else in the organization to be the repositoryof tactical expertise. What I do believe is that we have to have apoint of view about what we want, what the expectations are forwhat the function can achieve, and the way we want thefunction to achieve it. So, at that level Dick Hollinger was very,very useful.

E D I T O R : Since you have undertaken the reorganization, asthe Vice Chairman and COO, what are your expected outcomesfrom loss prevention?

S C H L E S I N G E R : It’s really pretty simple. Number one, Iexpect to have a level of partnership between the lossprevention function and the stores function primarily, that’ssignificantly better than we’ve had in the past. This partnershipmust develop the capacity to not only self-diagnose their lossprevention situations, but be actively involved in developingand managing their environments, including both safety andloss prevention.

Number two, I expect the organization to have dramaticallyenhanced processes and procedures to track and manageinventory and assets. I think we have the basics down as well asanybody, but the disciplines have to be defined in a systematicway across all of our brands simultaneously. Throughout all this,I expect to see the perception of our loss preventionorganization rise to among the most responsive supportfunctions that exist in the company. Further, I expect to be ableto tie their support of the respective line functions and theefforts of their work directly to the P&L, and be heldaccountable for investments in that function against the returnsthat they drive.

Finally, which in some respects is first, I expect them to bemajor contributors to developing and managing theenvironment where everybody who works here feels safe andsecure. As we find ourselves in very uncertain times now withwar and threats from all over the place, I need to know that wehave crisis preparedness activities inside the organization thatare allied with loss prevention and safety services in a seamlessway. This is necessary so that people feel comfortable, thebusiness assets are protected in a significant way, and we aregenerating economic returns.

E D I T O R : You are the author of nine books. Let’s talk aboutthe most recent one, The Value Profit Chain. I was taken byyour comment that some of your research encompassed not

26

only many companies and executives, but also the New YorkCity Police Department. How was that experience relevant?

S C H L E S I N G E R : I would argue that the reorganizationproposal that Paul has developed here and the logic that drivesthe reorganization activity here is strikingly similar to whathappened in New York City. The first step was to do asystematic analysis of all of the resources that you have at yourdisposal and reallocate the resources against the needs. Wehadn’t done that here in years, but that was a part of the LPteam’s start up process. We looked at our resources in safetyservices, our resources in the field, in contract guards, intechnology, and in the office, and asked the question, “Where isthe need?”

For example, one of the issues that Paul examined in his up-front analysis was understanding how much time our peoplewere actually spending in the stores. The same issue wasaddressed in New York City where many senior police officersheld desk jobs in great neighborhoods working days. Yet therealities were that crime was generally at night in badneighborhoods. Bill Bratton, the head of the NYPD then, cameto the conclusion that you have to match resources to theneeds. So he moved the well-trained desk sergeants out of theiradministrative offices and put them on the streets doingcommunity policing. That was a huge change.

The second part of the strategy was to not let little problemsbecome big problems. Historically, we have not had enoughdata and enough intervention to understand issues until theygot large enough to get noticed. You have to have moresystematic control and check points and more diagnostic pointsup front with higher levels of awareness within the storesorganization in the field, so that little things get identified early.If you are spending a fair amount of time helping people on thelittle issues, fundamentally I believe that the probability ofhaving big issues dissipates dramatically.

And so if you accept the fundamental reductions in crime inNew York City and the restoration of night life and the public’sperception of safety were a result of rigorous measurement andmatching resources with needs, I maintain that reductions inshrink combined with the better feeling of our population canbe achieved in much the same way.

E D I T O R : You talk in this book about hiring for attitude andtraining for skills, talk a little bit about that.

S C H L E S I N G E R : The vast majority of our stores jobs don’trequire profound levels of training or enormous depth ofunderstanding of complex phenomenon. They are primarilyindividuals interacting with customers. I can teach you how todo the tactical skills. I can’t teach you to be a warm, nurturing,caring individual. So the bottom line is that if someone comes

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through the interview process anddoesn’t bring those skills to theequation, the likelihood is that workingfor me isn’t going to change theirorientation towards life. It’s been verifiedin countless numbers of settings, butmost profoundly with Herb Kelleher atSouthwest Airlines. If you don’t have theright disposition, the right level ofoptimism, the right orientation towardsthe day, there’s nothing that working onyour environment is going to do. Allother things being equal, I start withattitude.

E D I T O R : What an interesting conceptfrom an LP standpoint to hire positive,energetic, enthusiastic individuals in lossprevention, because you have the sameexpectations of that group as you do ofany other group.

S C H L E S I N G E R : I agree with the firstSouthwest Airlines ads when they startedhiring against this profile, which read,“Fly Southwest Airlines—Where attitudeis more important than altitude.”

E D I T O R : You also talk aboutsomething that is a major challenge forretailers and that is breaking down thecycle of mediocrity. Retail shrinkagehasn’t moved very much in the last tenyears. The longer that goes on, itbecomes acceptable. But doesn’t thatsimply accept mediocrity?

S C H L E S I N G E R : There’s no questionabout it. I read your interview with [Wal-Mart Stores CEO] Tom Coughlin [“TheView from the Top,” March/April 2002].One of the issues that he addressed inthe interview was recognizing that theircurrent performance was unacceptableand setting targets that were so low as toalmost be laughable. That’s exactly whatwe’ve done in the past.

Now, we’ve basically said, “We’regoing to set a very challenging goal...agoal we’ve never met before as anorganization...and if it’s met, we’reperfectly delighted to pay for it.” Why,because if we tackle shrink effectively,we’re going to share the gains.

The book, Built to Last: SuccessfulHabits of Visionary Companies,highlights the notion that good is theenemy of great. What ends uphappening is when everybodybenchmarks themselves against eachother, you reach a level of acceptabilityof mediocre results that is defined asgood, and as a result nobody wants toget to great.

The fact that the industry shrinkaverage is X shouldn’t establish my long-term goal. It might establish my short-term goal. But fundamentally we mustinstill inside our organization that nomatter how good you are, you canalways be better. No matter how good

you are, there’s always someone outthere who has better performance. So,go find out who they are and learn fromthem. A mindset of continuousimprovement, regardless of the function,has got to be instilled in every one of theelements of this organization.

E D I T O R : I think you used a greatexample around the issue of hiring.

S C H L E S I N G E R : Hiring managershear that there’s a labor crisis and it’shard to find good people. So theyreinforce that notion by hiring mediocrepeople. You don’t have to look hard tofind mediocre people. And then youwonder why they say they don’t want towork today. The bottom line is youdidn’t spend any time recruiting them,you didn’t spend any time hiring them,you certainly didn’t give them anytraining, and you’re paying them poorly.So why would you expect them to wantto be excited to work for you?

For all of the academic jargon in mybook, it’s simply about managing thegolden rule in your relationships withyour employees, in your relationshipswith your customers, with investors, andwith the community. You live in acommunity, you owe it. Customers areyour economic lifeblood. They onlycome to you and they only expressloyalty over time when there’s arelationship between what they give andwhat they get, both in terms of productand the shopping experience.

The same is true with employees.Regardless of the state of the economy,employees have lots of choices aboutwhere they’re going to spend theirworking hours. The question is, “Whyare they going to spend their workinghours with you?” What are you going todo above and beyond a wage todemonstrate the value of your brand asan employer? The bottom line is all ofthese relationships rely on reciprocity. IfI treat the customer well, they comeback. If I treat employees well, theydon’t leave. If I return value to ourshareholders, they’ll continue to investin the business.

May – June 2003 LossPreventionMagazine.com 28

Loss Prevention reportsto me because talk is

cheap. At the end of theday, is it much more

important where I visit,where I spend my time,who I see, and what I

talk about. I believe thatunless someone at a

senior level is willing toengage at the level ofmore than words, youcan’t achieve the kind of change that we’re

trying to manifest herein loss prevention.

continued on page 30

May – June 2003 LossPreventionMagazine.com 30

E D I T O R : You comment in your bookthat change initiatives fail because of lackof sufficient top managementcommitment and investment. I don’tknow of any retailer who would say thatthey don’t have commitment and thatthey haven’t made an investment in lossprevention, but what do those wordsmean to you?

S C H L E S I N G E R : It’s easy to sit inyour office and write epistles and memosthat say, “I believe this, and I believethat.” But in large, complexorganizations, people want you to walkthe talk. It goes back to your earlierquestion about why loss preventionreports to me. Loss Prevention reportsto me because talk is cheap. At the endof the day, is it much more importantwhere I visit, where I spend my time,and who I see, than what I talk about.

I believe that unless someone at asenior level is willing to engage at a levelof more than words, you can’t achievethe kind of change that we’re trying tomanifest here in loss prevention. It justwon’t happen, because people won’tbelieve you. It’s not in the front of theirminds.

Loss prevention historically has notbeen a high-profile function inside thisorganization. People have not focusedon the economic consequences ofshrink. They’ve not seen a clear linkbetween the actions of the function andthe results that we’re looking for. As a

result, it’s easy to assume it doesn’t exist.So when somebody like Paul comes inand says, “I’m going to do it differently,”the tendency is to answer, “Why am Igoing to believe you?”

E D I T O R : Many companies use theterm “partners.” In your book you talkabout a partnering mentality, awillingness to be owned. What does thatmean?

S C H L E S I N G E R : There are threefundamental rules associated withpartnership inside this organization. Thefirst is completely transparenteconomics. Coming from a decentralizedenvironment where all of the decision-making authority was in the brands towhere we are today, the economics onthe brand side of the equation and thecenter-function side of the equationmust be completely transparent. If theeconomics aren’t transparent and opento everybody, someone is going toassume that someone else is takingadvantage of them.

Secondly, if we’re in a servicerelationship, that relationship must bemediated by a service-level agreement.We must have defined levels andstandards of support that meet internalcustomer needs the same way we’reobliged to meet external customerneeds. In addition, the functions mustbe evaluated against those service-level

agreements on a routine and regularbasis.

And third is that we actually have totalk. Over the last eighteen monthswe’ve aggregated all of the supportfunctions that are engaged in advisory orservice-delivery relationships with thebrands. On a quarterly basis, they cometo what we call Service Update Meetings,where we review with the brands theagendas and work of all of the variousfunctions.

E D I T O R : Typically, loss prevention ischallenged with directives like “You needto become partners with storeoperations, with HR, and other crossfunctions.” What is it that these otherareas need to do to become partnerswith loss prevention?

S C H L E S I N G E R : They need to knowwhat LP is. The HR people and thestores people have an obligation to learnwhat our loss prevention agenda is. Ineed to hold, not just the LP peopleaccountable, but I need to hold thestores people accountable for shrink atthe store level. That means the shrinkmeasures have to be as much on thescorecard of the stores people as theyare on the LP people. There has to be ajoint accountability, which incidentallyhelps cement that partnership andbrings it together. HR is exactly thesame.

The World’s Most Admired Specialty Apparel Retailer

Schlesingercontinued from page 28

continued on page 50

In February of this year,Limited Brands was namedthe world’s most admiredspecialty retailer by Fortunemagazine in its annualcompilation of outstandingcompanies in the world. Therankings are compiled from asurvey of 10,000 executives,directors, and securitiesanalysts.

Limited Brands achievedhigh marks in all nine areas

considered key attributes ofreputation:

InnovationFinancial soundnessEmployee talentUse of corporate assetsLong-term investmentvalueSocial responsibility Quality of managementQuality of products andservicesGlobalness

The top fifteen companiesin the specialty retail sectorare listed below. The surveyresults are available atwww.fortune.com/fortune/globaladmired.

Rank Company Score1 Limited Brands 6.942 Costco 6.853 Lowe’s 6.554 Home Depot 6.265 Best Buy 6.15

6 LVMH 5.937 Staples 5.808 Office Depot 5.709 TJX 5.6710 Otto Versand 5.3811 GUS 5.1912 Circuit City 5.1913 Kingfisher 4.8714 Gap 4.8515 Toys ‘R’ Us 4.79

May – June 2003 LossPreventionMagazine.com 50

E D I T O R : You recently had what wascalled a Loss Prevention CommunityWeek here. What was the purpose orobjective of that?

S C H L E S I N G E R : Three years ago,again, because this was a completelydecentralized organization, the notion ofbringing people together from across thebusinesses to deal with commonagendas inside this organization was aforeign concept. At that time, I washeading up human resources. Idiscovered that across the organization,we had somewhere in the neighborhoodof 300-plus professionals who had nevermet. If I have to change the agendas andstrategy of the organization, which, ofcourse, will touch everybody in someway, it just strikes me as ridiculous to notbring them together. So we startedsomething called HR Community Day. Itevolved to a Merchant Community Day.That was the first time in the history ofthe company that we ever brought themerchants together. A MarketingCommunity Day. Again, the first time inthe history of the company we everbrought the marketers together.Interestingly, as the quality of thosemeetings increased and the depth towhich people wanted to work throughissues increased, we came to realize thata day was not enough time for thesemeetings.

So, steeped in this culture, Paulsuggested we get everybody together.We clearly had a number of issues toaddress, not the least of which was amajor reorganization. We wanted to givepeople the opportunity to sign up withtheir eyes wide open. Instead of dealingwith all of the kind of nonsense thatexists in the rumor mill about the newdirector and the new organization, weput Paul in front of everybody and letthem shoot whatever questions theywanted. He laid out his vision for thefunction for everybody to hear. Wediscussed a number of hard issues indepth...the issue of inclusion, team-building skills, the technical dimensionsof what shrink means here. Before, everybrand was allowed to define things theirown way. Now, there’s one definition,

there’s one language system. We toldthem that there’s one process and youmay not like it.

So, it was my expectation that at theend of the week, when you have beenfully informed, you raised your hand andsaid, “I want to work here.” In a speech Igave that day, I said, “The decision’sbeen made. We are clear about what thedirections are. We realize that some ofyou might not like it, and we understand.That doesn’t mean you’re a bad person.It just means you shouldn’t work here.”And, we gave people the opportunity toelect in or elect out.

If somebody signed up after theweek, we can treat them as fullparticipants with a set of expectations fortheir behavior and their performancethat, I think, we can realistically holdpeople accountable to.

E D I T O R : There’s obviously atremendous amount of changeunderway at Limited Brands. What doyou say to those inside the organization

who might be struggling with the idea ofchange?

S C H L E S I N G E R : The answer is, “It’snever going to stop.” A quote showed upin my in-basket today from the armychief of staff that says, “If you don’t like change, you really won’t likeirrelevance.” I think that’s fundamentallywhere we’re at.

Ours is a business founded on aprincipal of changing the way it went tomarket because of perceived deficienciesin strategies used by full-line specialtyand department stores of the ‘50s and‘60s. This business has evolved andchanged in so many ways over its fortyyears, which is why it has survived.

The changes have been more intensein the last decade largely because thechanges in the external environmenthave become more pronounced. Thereare more channels of distribution. Forexample, apparel is the fastest growingchannel for the Internet today. Two yearsago, it was a non-entity. Four years ago,we had an insignificant little businessselling intimate apparel on the net withVictoriasSecret.com. Today it dominatesthe Internet direct sales channel.

Everything is changing. The mall ischanging. Ten to fifteen years ago, youcould count on fifty malls opening in ayear and virtually all of them beingsuccessful. This year, you can count onmaybe three major malls opening up andwho knows whether any of the three willbe successful. The notion that we cancelebrate ourselves as being focused onchange is nonsense. We either adapt at apace that is as rapid as the change that isgoing on outside us, or we die.

So at the end of the day, and thething we keep talking about inside theorganization is, if you’re not changing asrapidly as your business environment,you just keep falling further behind. Alarge part of the leadership task insidethis organization is to get theorganization emotionally adapted to thatreality, and then physically andorganizationally prepared to executewith the most advantage that we canpossibly have. That’s an amazinglymarvelous challenge to play with.

When everybody bench-marks themselves

against each other, you reach a level of

acceptability of mediocre[shrink] results that is

defined as good, and as a result nobody wants

to get to great.

Schlesingercontinued from page 30