AIRA Newsletter

In Part One, published in the February/March 2004 issue of AIRA News, the subject of possibly hiring a private investigator was introduced, and the more significant events involved in the hypothetical turnaround had been completed: costs were understood, the overall company operational strategy was developed, objectives and action plans were identified, debt was restructured and the “A Team” was on board. Unfortunately, this downscaling involved terminating several employees. The turnaround professional, as he or she should be, was involved in the selection of the employees to be terminated, but in this case did not perform the actual terminations.

The management team was now on a plane to Chicago where they were presenting a proposal to vault the company into a profitable future with a backlog level never enjoyed before. Everyone was optimistic as the company had developed a relationship with a supplier that had just had a product approved by ASME. This new supplier met the contract specifications and its product was 30% less expensive than previously used materials. You had an understanding with the material supplier that your company had sole access to these materials for purposes of this bid. Therefore, your company was actually able to raise prices on some items, as these materials made up a majority of the costs. You thought everything was great.

Well, everything wasn’t great.

At bid opening, a local competitor not only specified the exact same “exclusive” materials as your company did, but they beat you in certain areas where you raised your prices. They were awarded the contract and you couldn’t convince the purchaser otherwise.
How could this happen? How could someone know this information and use it against the company? Well it happens every day and in companies much larger than the one used as an example.

According to a study by the American Society of Industrial Security and PricewaterhouseCoopers, Fortune 1000 companies sustained losses of more than $45 billion in 1999 from the theft of proprietary information – up from the FBI’s mid-nineties estimate of roughly $24 billion.

The average Fortune 1000 company reported 2.45 incidents with an average loss per incident in excess of $500,000. Even more troubling: forty-four of the 97 companies that participated in the ASIS survey reported a total of more than 1,000 separate incidents of information theft. How many were not reported or never identified?

The turnaround professional who is not aware of what can and does happen by means of espionage and who does not make an effort to protect the company from the significant cost it has on an organization is not doing his or her job. You fight hard to capture every last penny in product costs, why wouldn’t you fight to save thousands of dollars due to espionage?

The No. 1 most stolen item is customer lists. This fact makes dot-coms, start-ups, software firms and internet service providers, which typically keep extensive customer information lists in their marketing department, prime candidates for espionage. But wouldn’t you, as a turnaround professional of a mid-sized manufacturing company, like to have your competitor’s customer lists, know the volume of business done with each of them? Sure you would; it would provide a definite competitive advantage. Your competitors feel the same way about your list. Financial data, research and development work, merger and acquisition plans, unannounced product specifications, and prototypes round out the ASIS’ list of hot commodities.

As a turnaround professional, you need to know what motivates people to commit espionage. You will quickly learn why you are so susceptible to having information stolen.
Motivation for espionage:

Money – The primary motive. Some spy for money because they need it to pay off debts or to get themselves out of some fix. Even if an individual begins to spy to get revenge (i.e., from being fired), having money becomes so convenient and so pleasurable that continuing to spy becomes an addiction.
Disgruntlement – This motive for espionage usually refers back to the workplace, where disappointment, anger, frustration, or alienation can arise from interactions among co-workers or between employees and supervisors. Feelings of disgruntlement often lead to efforts to get revenge, and espionage can be seen as one way to get back at the offending individual or organization.
Recognition – A secondary motive is to achieve recognition, approval or ego-enhancing attention from the new employer to whom they provided the information.
Ingratiation, coercion, and thrill seeking also play a part in initiating an espionage event.
In the initial scenario, there were several ways for the competitor to obtain the vital information to win the contract.

Was the bid information tightly controlled? Was there limited access to the total proposal? Did any of the terminated employees with insight to the change in materials end up working at the award winning competitor? In smaller organizations or specialized product organizations, it should be assumed that these former employees will seek employment there and that the competitor will want them. Did anyone from Purchasing get let go who was also the contact to the material supplier? Did the competitor hire anyone from Accounting who had access to costs? These questions are just a few of the ones you should be asking.

There are hundreds of ways proprietary information can be obtained. The key to eliminating this risk is to make the transfer of this proprietary information very expensive to anyone who transfers it illegally. All employees should have to sign written policies and, certainly, these policies have to be reintroduced and reconfirmed during exit interviews. Let the former employee know you are very serious about these policies and/or agreements, and will prosecute any offenders. Put a price on violating the policy. A call to the competitors, informing them of your position on the matter and the possible actions you might take, might be appropriate.

Over the years, I have written letters to direct competitors during larger layoffs letting them know I was having to terminate some of our valuable employees in order to compete with them in the future. I tell them that they are good people and were good employees and that they should consider their applications. I then mention that we also take the rights to our proprietary information very seriously and will aggressively go after anyone who violates the agreements we have had signed by these employees. Does it keep the competitor honest? I think it certainly puts a price on not being honest. And, in some cases, it proves lucrative to have it in writing.

Companies have to protect themselves. Keep audit logs when people access computers and sensitive information. Keep important information on a need-to-know basis. Require employees to change passwords frequently. Don’t just have the policies – enforce them. Too much work? I don’t know. You just lost the most significant contract in the organization’s history. How expensive is that?

The true turnaround professional has to recognize that legitimate competitive intelligence gathering is a very big business and an important part of being competitive. In Europe and in the Far East, every company of size has dedicated departments that do nothing but research the competition full-time. In the United States it is estimated that 5% of the larger companies employ staff full-time to research the competition.

The true turnaround professional needs to know the characteristics of the most effective operative. They are usually a trusted employee within the targeted corporation. The employee could be anyone from a janitor to an executive. Secretaries and other support personnel have good access to proprietary information, and their low wages make them more susceptible to recruitment.

According to the Business Espionage Controls and Countermeasures Association, which this writer is a member, describes a typical operative as: 21-35 years old; female as often as male; college graduate with a low level degree; broad, short-term employment background; money problems; military intelligence experience; considered a loner or outsider; romantic hobbies (i.e., scuba or skydiving).

The bottom line is that you cannot stop this illegal activity. By being more knowledgeable about it and putting the basic deterrents in place– which are nothing more than common sense controls – losses incurred by businesses can be reduced. Protect propriety information, install internal controls. Let the losses be incurred by your competitors!

The turnaround professional needs every tool available to meet the challenges that exist in most turnaround situations. It is impossible to know everything about everything that might or could happen. It is not impossible to know everything that has to be evaluated. This means that the turnaround professional needs access to the necessary tools. Private investigators and competitor analysts are two tools that can acquired on an “as needed basis.”

Putting the following items on your engagement “to do list” might be an excellent idea:

1) Review of the proprietary property disclosure in the employee manual
2) Review of policy on password changes, when employees leave
3) Review of controls on significant bid information
4) Create a policy on immediate notification of senior management, when a laptop or any storage device is missing
5) Review exit interview procedures
6) Consider a review of information controls by an outside party i.e. private investigator
7) Consider a “bug sweep” in certain areas
8) Review access logs and information controls in general.

In this particular article we did not focus on the use of a private investigator. Many of the tasks that need to be completed can be completed by the turnaround professional, or his or her team. Sometimes the skills needed to do the task correctly are not present and the use of an outside expert is appropriate. Use the right tools!

In the hypothetical case described at the beginning of the article, if there was evidence found that proprietary information was used in clear violation of the policies of the company, it would not be unreasonable to contact the organization awarding the contract and disclose the problem. Maybe a contract reopening would be possible and appropriate. Legal counsel should be contacted, if the contract is significant, and one should pursue all means available to be awarded the contract. This makes the taking of this information by the competitor have a “real cost.” Business is a race, but one in which the second-place finisher doesn’t receive a medal or a profit.

Special note: the subject of legal competitive intelligence gathering is an important topic to explore and will be the subject of future articles.

Mr. Stover has over two decades of successful experience in the turnaround environment within a variety of industries and in various capacities, holding several senior level positions at companies that ranged from start-ups to Fortune 100 organizations. He earned a BS in Accounting from the University of Southern California, and a MBA in Management from Pepperdine University. He holds the following credentials: Certified Turnaround Professional, Certified Insolvency and Restructuring Advisor, Certified Fraud Examiner, Certified Management Consultant, Certified Confidentiality Officer and Certified Professional Consultant to Management.