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Analytics Seek Outliers To Expense Norms

August 24, 2011 - 11:30 PM ET

By Mary Ann McNulty

Better analysis of travel expense data could help corporations shave "2 percent to 4 percent off their annual travel spend," IBM Global Expense Reporting Solutions director Raymond Curatolo said his firm has found during the past six years as it developed a new audit service.

A "collaborative effort" among IBM's GERS, Research and Audit business units, the company's new Insight Audit Service is designed to analyze all expense reports filed on a semi-annual basis, compared to a prior period, to search for behavioral shifts, policy gaps or fraudulent behavior. The audit and business controls review is designed to "look at data across expense reports, over time and across business units and companies to identify what is normal and where are the outliers," said Pietro Desiato, IBM Global Process Services GERS project executive.

While the service looks for fraud, especially the harder-to-detect examples, "this is about behavior," Curatolo said. The service helps companies identify business practices and policies that, if changed, could save money; for example, receipt policies and submissions, preferred vendor usage and approver actions on policy exceptions. It also identifies expense reports that the company might want to audit more frequently or closely.

"Insight is putting analytics and intelligence on top of the data to improve compliance with policy and help you change policy," Desiato said.

Applying algorithms originally developed for cancer research and oil-well drilling to travel and entertainment scenarios, researchers built models to identify the outliers, not the normal inconsistencies in business travel, Curatolo noted.

The initial productivity savings of expense was all about taking the headcount out. Now it's more about seeing the bigger-picture trends.

RAYMOND CURATOLO, IBM Global Expense Reporting Solutions director

For example, the technology has to be able to distinguish rate variances between major and secondary cities to correctly identify the outliers in expense reports. The data normalization endeavor was significant, he added. Five or six researchers spent months modeling business travel data to ensure that the results would point to real management issues, not one of the many variables in travel expense management, he added.

Expense data is sent to an audit server and analyzed by technology, as well as by members of IBM's global services audit team, who typically in two to four weeks deliver an extensive report—perhaps a couple hundred pages—of  results and analysis. The first five pages are the key findings, with the entire document presented as a CFO-level report, Curatolo said.

The report may recommend travel policy changes, such as lower-threshold receipt requirements, more stringent expense-approval processes or marketshare shifts to lower-cost providers. One recommendation, Curatolo said, was for a client to shift share to another of its preferred properties in New York City to attain a per-night savings of $30 or $40.

Service Vs. Technology 

"We went with a service, versus bundling this as technology," Curatolo said, "as clients might not have, or continue to have, the expertise in-house" to run reports and analyze the results, especially when such reports are run just twice a year. The service was designed to take client data from any expense reporting system, not just IBM's, he added.

In coming months, Curatolo said he expects 15 to 25 corporations to use the service, which was rolled out this year after a pilot late last year. Instead of semi-annual audits, one client asked to use the service "four times a year, but only look at seven behaviors. They are looking at policy changes," Curatolo said.

Pricing is based on volume, but Curatolo said "it's not a high-priced item or just for large companies. It pays for itself in about eight seconds. We're willing to sign commitments that if a client acts on suggested recommendations, we will stand up to a minimum of 1 percent savings. But if they don't act on them, we can't be held to this. It's putting our money where our belief is."

Clients have asked IBM to benchmark results across its customer base, and Curatolo said "you will see something in this area of benchmarking later this year. That will be shaped by our customer base," who will identify "what should we be benchmarking, what is of interest."

IBM's GERS advisory council already has helped the company advance its Insight reporting, composed of 18 pre-built reports that any client can run to identify inconsistencies in expense reports. The reports also rely upon algorithms, statistics and the expertise of IBM's research and development resources.

One report looks for "dependent expenses"—toll or gasoline costs without a rental or personal auto expense submission. Another report searches for duplicate reimbursement of meals or instances in which an employee is listed as a guest on a group business meal and submits personal expenses for the same meal. Other reports search for those who frequently miss receipts, routinely file just-under-the-receipt-threshold expenditures or have excessive cash versus card charges. Another report identifies managers who rubber-stamp expense reports with policy violations. Reports also highlight travelers with outstanding advances, travelers who expense costs on weekends and reports in which there are anomalies with the approver.

Working with the council, IBM GERS and researchers "came up with 20 to 25 scenarios" of expense behaviors on which to base query reports. IBM decided to pre-build the reports to ensure that clients correctly identify issues.

The reports identify the percentage of expenses that meet a certain criteria, number of such expenses and the dollar value. Through drill-down capabilities, managers can review each such expense report filed by a traveler to determine whether action is required.

While some companies might not file charges against employees for suspected expense fraud, Curatolo said he has seen more issue Internal Revenue Service 1099 untaxed income reports.

"There are so many solutions out there to create an expense report. Everyone has similar capabilities, but the data we capture and analyze is what's important," said Desiato. "If you can get more out of your data, you can drive a business case in terms of switching providers or upgrading technology, and leverage your data for vendor negotiations."

According to an IBM Institute for Business Value report about the value of analytics, "Whether focused on growth, efficiency or innovation, organizations need to know what is happening now, what is likely to happen next and what actions should be taken to get the optimal results. By embedding information and insights into everyday operations, it is possible to provide that value."

According to Desiato, "IBM spends about $5 billion a year on research and development, improving analytics in all areas of the business." But Curatolo noted, "As the economy has tightened, we're turning what was a process owner in a company into a champion of savings. The initial productivity savings of expense was all about taking the headcount out. Now it's more about seeing the bigger-picture trends."

This report originally appeared in the August 2011 edition of Travel Procurement.

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