IBM Plays It Smart: Launches Neural Nets

<H1> IBM Plays It Smart:
Launches Neural Nets</H1>By Cheryl Rosen

<I>Endicott, N.Y. </I>- IBM, the nation's largest travel purchaser, is beta testing a new wrinkle in automated expense processing: neural net technology.

Rather than having computers audit expense reports according to rules entered by employees, IBM's centralized Travel Accounting Services department is building a system that will identify spending patterns that differ from the norm-and will suggest to auditors potential abuses they never would have caught on their own.

The Neural Net Automated Auditing system uses the same kind of artificial intelligence that alerts credit card and telephone companies to potential fraud, and prompts the telephone calls many cardholders have received asking whether they have actually made $1,500 worth of calls to South America, or if their card has been stolen. Similarly, IBM's Neural Net-dubbed IRIS by the travel accounting team-will alert workers to deviations from the standard in hundreds of different areas.

"We have taken the standard neural net software and adapted it to a travel application, and I don't believe that has ever been done before," said John Rosato, systems and controls manager of IBM's centralized Employee Compensation and Expense Accounting department, where 32 staffers pay traveler expenses and bills for all IBM operations nationwide.

The IRIS system first will review and print out expense reports for obvious exceptions to corporate policy-for example, when a traveler entitled to fly only coach is asking to be reimbursed for first class. Reports that pass inspection will be submitted for a full review by the neural network.

"IRIS looks at things more carefully, using fuzzy logic to search out patterns of data," Rosato said. "We train the neural network by feeding it lots of data, lots of patterns of good travelers, until it can take what it has learned and start kicking out things that don't fit the normal pattern. And the system keeps getting smarter as is spits out expense reports and we tell it, 'no, that one is okay.' "

This week, IBM will run its first big batch of expense reports through the IRIS system. IRIS will pick up unusual combinations of expenses-things like employees from different departments who always travel to the same places at the same time, those who always go to the same restaurant or those who visit a given destination an abnormal number of times. Also on the IRIS hit list will be people who constantly ask for exceptions, who do not use their corporate traveler card or who consistently exceed spending limits.

Each of these questionable circumstances might have a perfectly logical explanation-people working on a rush project or those who have found a great place at a good value where they love to take customers, for example. "They may not be doing anything wrong, but they warrant a closer look," said Bob Hughes, IBM's national travel and relocation accounting services manager. And in any event, IRIS and the travel department will not be policing the rules, but simply reporting the data to managers who can then decide for themselves what action to take.

"Managers may say 'okay, I needed my marketing people to travel at the last minute on this,' or they can decide it was the right business decision based on the circumstances," Hughes said. "But at least they have the data to make informed decisions. The real power of the IRIS system will be in detecting things we never even thought to look for."

Having a staffer like IRIS-that in effect "remembers every traveler's entire history"-is expected to be the latest in a series of process improvements for Big Blue, where the sheer volume of expense reports and bills makes it impossible for people to recall details of travelers' individual trips and histories. As it rolls out in 1997, IRIS will be scanning over a million expense reports from IBM's base of 100,000 employees every year.

The IRIS system is the latest piece in an overhaul of travel accounting that IBM estimated saved at least $30 million in 1995, its first full year of operation. The company has consolidated travel accounting from more than 100 different sites to a single location in New York, and moved to an internally built online automated expense reporting system, the National Employee Disbursement Systems, which it also markets to other corporations.

Travelers fill out their expense reports online and print out a cover sheet on which the expense report number is bar-coded. Receipts are scanned into the system, then paid electronically to credit card vendors and employees.

While the accounting department guarantees reimbursement within five days, employees generally are paid the same day or the day after submitting receipts.

IBM's system has recently won two major national awards: the Hackett Group prize for Best T&E Processing, and CFO Magazine's Reach Award.

In June, with the IRS changing its requirement to no longer mandate receipts for travel expenses under $75, IBM took the opportunity to slash another step from its expense reporting process by raising its receipt threshhold to the new limit from the previous $25.

While some industry insiders warned that going to a $75 receipt threshhold would result in travelers "upping the expenses they were charging to $74.99," IBM "has not found any big change" in charges, Rosato said.

Perhaps IRIS will find differently, but Rosato doubts it. Before changing its receipt policy, IBM reviewed six months' worth of expense reports submitted under the $25 receipt threshhold-half a million expense reports in all-and found the average charge for items expensed without receipts to be not the limit of $24.99, but rather only $8.89.

Eventually, Rosato said, IBM hopes to "match the expensed information with our credit card data and our agency data from our corporate travel card, and eliminate receipts altogether."

The automation of the expense reporting process and the centralization of all the data laid the groundwork for "data mining" by artificial intelligence agents like IRIS, Hughes said. "We have this huge database, and now the time has come to turn that data into information," he said.

Rich Bannon, IBM's director of corporate accounting services, said automating the expense reporting process has slashed the cost of processing from $23 per expense report three years ago to about $4 today. Multiplying those savings by the 1.6 million reports that come through the Endicott office yields an annual savings of more than $30 million.

Both Rosato and Hughes declined to comment on how much money can be saved by using IRIS. Bannon, too, said he has "no idea" about the savings IRIS will generate, other than an expected reduction of "a handful" of staffers. But he has high hopes.

"Neural net came from our commitment to continuous improvement, looking for ways to improve our auditing and our selection of targets for audit," he said. "It will mean going from a process that audits based on transactions to one based on trends."

For instance, "we ran one report asking for every trip not booked through our agency, and found one traveler who did that 12 times in the last quarter, and every time said he did it because it was a last-minute trip," Bannon said.

"A human auditor questioning a single expense report would say okay, that's reasonable," he said. "But the system takes the argument out of the transaction base and looks at the trend, and says it's not reasonable."

Similarly, IRIS will catch travelers who constantly submit expenses of $74 to beat the $75 receipt requirement, or consistently file meal claims of $26.50 in a city where the per diem meal limit is $27.

And what will the accounting department do in those cases? "We think just calling the traveler and questioning the claim will be an inhibitor for him in the future," Bannon said.