Enjoyed talking to Anant Kale, co-founder and CEO of AppZen. Having started AppZen in 2012, he is one of the pioneers in the commercial applications of artificial intelligence in fraud and compliance. We discussed AppZen’s evolution and roadmap, primary areas of focus, its benefits to companies, how the solution ensures lasting T&E reduction along with setup & pricing details. As with most back-office processes, I now view T&E audits as highly automatable. This will be an interesting field as more companies take advantage of the significant ROI offered by rolling out real-time expense audit solutions and reduce the size of their back-offices. Below you can find our podcast edited for clarity and brevity.
Anant: AppZen has been around for about four years now. We started off building a platform for the enterprise back-office automation beginning with expense reports, initially on the employee side. We aimed to help employees easily create expense reports using technologies like NLP, machine learning and so on.
As we were progressing down that front it dawned on us that there was a bigger problem. Talking to CFO’s of our customers, we learned that there was a bigger problem around compliance and auditing, where not much had been made and the existing solutions had a human process around them. We started exploring that and about two years ago launched the AppZen AI audit, a purpose-built solution for auditing expense reports or detecting compliance misuse, fraud issues in expense reports.
It’s a platform that works with existing expense management systems, companies do not have to change what they’re using, our customers use everything from Concur, Oracle, SAP, Coupa or whatever they want. Behind the scenes AppZen works in real-time extracting data from these systems, analyzing it, augmenting it, applying machine learning to it and clearing out misuse and fraud and compliance in real-time. That’s the real power of the system. We have been out with the expense automation audit platform, the platform will be extended to offer the same services for invoices, procurement and so on.
Cem: It is interesting indeed. So that then really increases the scope a lot.
Anant: Yeah because those are really ancillary so our platform has three key segments to it.
The first one is data extraction. Essentially, we look at all the transaction documents in case of expenses, we look at everything from the expense data and the structured data all the way to any receipts, emails, portfolios, travel documents, credit card data, whatever we can get our hands on. We leverage databases that belong to the company itself, it could be the card swipe data or their HR data. That’s the set of data which belongs to the transaction, belongs to the company.
Our second piece of the platform is a data augmentation platform which extracts data from public sources, it could be reading social reviews of merchants, finding out pricing information, finding out the true nature of business to see if there any gentlemen’s clubs and things like that which are masquerading as a restaurant, finding out information on individuals to see if they’re politically connected and so on so forth. That’s a huge piece of information that we have been collecting over a period of time for every analysis that we are doing and it all gets back into the database back into the expense report. This piece mimics the human research like you and me if you were doing this manually, we would Google some stuff if you don’t know, this is what the machine is doing but at an unprecedented scale.
The third piece is the behavioral aspect of It. To figure out whenever there is a violation, what is the pattern behind it? Tells us whether it is an intentional violation like somebody misusing expenses, intentionally committing fraud or an accidental violation. It’s very important to differentiate between those patterns to figure out which ones you want to focus on, which are the groups of people or which are the individuals or to focus on, which are the vendors to focus on. So that’s the third piece or our platform.
This is how auditing or compliance is done for any kind of transaction, right now the whole system is optimized, and used for expense reports but it’s the exact same process for procurement and invoices and so on.
Cem: That’s very clear and the companies that are providing software, for example, the expense management software, are they trying to get into this business as well?
Anant: No actually, this is a completely different technology but also an application of focus that a company needs to have for providing what we are doing. All the expense management applications are focused on easing and improving the employee experience. So if you look at who uses AppZen and they’re probably a handful of people in the company who will use AppZen. They might have 10,000 employees but the people who are aware of AppZen, using AppZen are in the back office, maybe 10, 20 people who work in finance or auditing. When employee expense management companies are focused on the front end, making sure that those 10,000 employees who are using the expense management product are able to do it very easily, are able to spend the least amount of time reporting the expenses importing the travel itineraries and so on.
While ours is a back-end application, it’s not just related to expense reports but it takes care of the holistically the overall policy and compliance of expenses. It’s a different approach it requires a different mindset.
Cem: Can you explain a bit the ROI, from the company’s perspective? For example how big of an operation is it? And if you could also add in some cool things that you caught along the way, I’m sure there are plenty of expensive improprieties.
Anant: What we find in an expense report is always a surprise to the companies. Most common are people going to strip clubs expensing that as entertainment. We have seen bigger compliance issues around companies or the employees entertaining guests from companies which have been banned by the US government. We have seen violations where managers are not looking at what their employees are doing, expensing everything from yoga classes to spinning classes and nobody knows. All the way to companies or individuals intentionally duplicating their expenses, claiming the same expense multiple times.
So, these are the kinds of things that happen. It’s very normal and we end up finding that in many companies. It’s always a surprise to them but for us, it’s part of the business that our system is this, is getting smarter and smarter to figure out different kinds of fraud patterns. We see even things like on travel itineraries, people are booking their spouses and flying on that, canceling and claiming the money and things like that right? So, there are plenty of violations, I won’t name any companies or get into details of that. In terms of ROI which is key here, why would somebody buy our software and use that?
So, the key things are basically 3. One is using software like ours allows them to have 100% auditing in real time. If you see today most companies, if they want to do any kind of auditing, any kind of review of expenses it has to be manual and it’s very expensive. I mean employing 10 people to look at your expense reports is very expensive. So, what most companies do is, they routinely audit only about ten, twenty percent of their expenses. Most of the time to reduce costs, they offshore that function sending it to India, Philippines and so on.
So as a result of AppZen doing that audit, we take that company directly from a 10-20 percent audit to 100% audit. Instead of having a week turnaround or two weeks later somebody calling you telling you that hey, there is an expense report problem out here, this is happening in real time within minutes of an expense report submitted. So, in terms of ROI, a reduction in the headcount or number of people required, we have seen anywhere between 50 to 80 percent reduction in a number of people that are required to process expenses, as a result of using AppZen.
The second one is a much higher ROI point and is about T&E expenses. As a result of AppZen doing 100% audit, taking your expenses from a 10-20 percent audit to 100% audit is a significant fivefold increase in the number of expense reports that are audited. But more importantly, our detection rates are so far higher. We are able to find stuff on things that have already been reviewed by their auditors, reviewed by managers and paid off. Because machines can do so much more research on every expense, compared to what a human can. So, our detection rates of far higher and we have been able to find out violations anywhere between one to five percent of expenses. So, if you look at like at T&E expenses that happen in a company, taking a few points of that expense can save company millions of dollars. That’s probably most in terms of value, highest value in terms of ROI.
And the third is compliance. Now, you can’t measure that. What would happen if you found your company to be non-compliant with regulatory requirements? We have regulations for financial companies, pharmaceutical life sciences companies, we have gender regulation like FCPA compliance, anti-bribery compliance, all those kinds of things. So those you cannot measure them, most companies are not doing anything around it in expenses because it’s impossible to look for every attendee, find out their political exposure, whether they work for the government and things like that. But if you are caught in some violation then the cost is immense to the company.
So that’s the third one, where we are protecting things by having an active compliance. It is real-time so the if at all there is a problem happening around compliance we know right away.
Cem: I expect when you first move in, there are many cases you discover but over time I expect people to get smarter and understand the how the current system works. How do you cope with that?
Anant: The premise is that also employees are honest, they’re going to do the right things. But if you don’t detect anything and they if they find that there is nobody policing these expenses, then they’re going to have people who are trying to be opportunistic sometimes like let me slip this one through. Our goal is to change the behavior of the employee, if you change the behavior of the employee makes them more compliant, then automatically your T&E expenses are going to get reduced because they’re going to be less leakage, fewer violations. So, the way we do it is by first real-time auditing it and then measuring employees’ behavior.
One of the key aspects of the AppZen platform is to detect the behavior and metricize it. So, we have something called as an Appzen Behavior Index (ABI), think of it like a credit score for employees. Just like we have a credit score which shows creditworthy we are, an AppZen customer has an ABI score for every employee. The ABI score is very simple, it is between zero to hundred and basically tells you if this employee is compliant or not. If they are compliant then, they’ll have a score which is lower, the lower the score the better. If their score is more than 50, then it there is something wrong in that compliance. And there is a complex model behind the scenes which calculates that index for the company and typically what we see is that, in most companies, 90% of the employees will be in the 0-10 range, in terms of scoring and then there will be a few outlier employees in the 50-plus range.
Now, why are we doing that? Because like you said, if we start finding violations in real time the employees are going to know about it. The employees won’t know how somebody is detecting doing this. However they will see that any kind of violation that they do, they are being detected as they get messages from my system which warn them like we found that you upgraded yourself to a business class, our policy does not allow it, don’t do it again. Most companies will not go back to the employee for a refund unless it’s a very serious violation. Most companies will say don’t do this again, otherwise, we are not going to pay you. But the goal here is to police it in real time and to let them know. When the employee is told all the time that this is not allowed, we are letting it go a couple of times, they will stop doing that behavior. However here’s some who will not stop, that’s why we want to measure it.
So, as we look at a score every month, you want to see a reduction in the score. A reduction in the score tells us that this employee is changing his or her behavior which means the violations are going down. We come to a point where the scores come down because the employees know about it and the employees are not indulging in that kind of behavior. But then there may be a few outliers who continue to do that and then those have to be stopped either terminated or the manager talks with them and so on.
Cem: One thing that I hear or think most companies are, how they use their data and yeah, I find that exciting when companies can use most of all customers’ data in an anonymized aggregated way. I think you have an opportunity to do that as well, right?
Anant: Absolutely, that’s key. Our system always learns different patterns around expenses. So, why are there anomalies in these expenses, in these business meals or entertainment? How often do they upgrade? What kind of upgrades are consistent? The system is figuring out where the anomalies are vs just finding out there’s an anomaly. Some insights are standard across the industry where our system continues to learn them while some insights are specific to a company’s culture. That remains within the company’s domain itself.
So, we have two kinds of learning: one learning across the industry and a second which is just for that company which tells us that though this policy states certain things, this company is very lenient, you don’t want to find certain things, company is okay with certain kinds of behavior. These are unwritten rules, we have to find and learn them because we can’t keep on detecting things which nobody cares about. Those are the two things that we always look for. One is across all our customers’ data, new fraud patterns, new tolerance limits which keep on getting aggregated and some things which are very specific to the customer itself.
Cem: And can you talk a bit about the set-up, how long it takes, what’s the pricing?
Anant: We work with almost every major expense management company out there. As I said Oracle, Concur, Coupa, Expensify, Chrome River, we are integrated with their expense software. Since AppZen in is already connected to these software, customers don’t have to do anything different, there is no IT involvement, they simply turn on the button and the data starts coming from these expense management software into AppZen. From an implementation point of view, there’s no friction at all, it can be turned on within a few minutes.
Cem: No fine tuning at all, from your part?
Anant: That’s the installation or connection part. We start off with a template of patterns that we already know. So, we don’t start off with saying what do you want us to find? Most customers don’t know what they want to find. We know what to look for, we already have a very good pattern detection template. So, we start off with that template for every customer and we calibrate it based on the policy that they have published. So, we configure the company’s policy into our template.
Once we do that, we have a period called a parallel run period. It typically goes on for about four weeks. For smaller companies, it is about two weeks, for a very large company it might go on for four weeks. Essentially that’s implementation because, during that time, AppZen is running behind the scenes, real-time detecting everything while the company is still following its current process. All that they’re doing is validating what the AppZen does. Are we finding few things? Are we finding too many things? Do we need to tone down some of the findings because they are good but not something that is important right now? We basically figure out what are the top three things that we want to look at after we go live, which is up in four weeks and then slowly go deeper and deeper, turn the knob, so that even the other things which we initially didn’t look at those things get looked into. So that’s our typical go-live period, it takes about four weeks for a customer to go live.
Cem: And how do you price it?
Anant: Pricing is based on transactions, so we only charge for the number of expense reports that the customer is processing. So, we look at hey, are you doing hundred thousand expense reports a year, then here is your price. So, depending on the volume, we will give them a discount.
Cem: Can you share the price for a small customer? Just to give me an idea.
Anant: Yeah so for a small customer, it could be around four dollars per a processed expense report. We’ll discount it based on the volume that they have.
Cem: Okay then for a large company with like hundreds of thousands, there will be significant discounts, right?
Anant: We have customers processing million expense reports, Fortune 50/100 companies. The fact is that the system has such a good ROI because there are no soft savings, this is all hard dollar savings that the company gets within a few months. Companies easily get a very high ROI with us.
Cem: What do you think of competition and what do you think sets you guys apart?
Anant: We don’t have any competition today. We compete with essentially company’s internal T&E auditors. Such teams normally have a team of 10-20 people in T&E, we are basically doing that function. We don’t look at them as competitors because we are essentially giving them a tool to do this job much better and use their time much more productively. We haven’t come across anybody attempting this, there are lots of robotic process automation (RPA) tools, who try to mimic how human auditors work and we have customers who’ve tried these leading RPA tools. Nobody can build a generic tool and use it for a specific business function. It just doesn’t work. You can’t take an RPA tool and train it to do certain things. This requires a purpose-built solution. We have seen numerous companies take off-the-shelf products and try to use it for T&E and it never works. Our detection is so far higher. That’s the kind of thing we see, it’s not a real competition but it is people trying generic tools and trying to build teams in-house who can do limited learning so it never works.
Cem: It sounds like such a good business because you’re saving hard dollars and for you, once we have the product, the variable cost is relatively limited. On top of that these hard dollar savings, you deliver labor savings to the company. It looks like such an attractive market to enter if you have some data to train on and if you can be able to build a good product.
Anant: It’s not just the product, it’s all the surrounding things around it. We are product agnostic in terms of what we use. The product has analyzed so many different industries and customers of different sizes that the data that we have is a big part of our value. The patterns that we have built is not based on 100, 200, 300 thousand expenses. They are built on tens of millions of expense transactions that have been classified. So, as we process more and more we are getting better and better. We are able to achieve things which are impossible for those to replicate and we will always be at the forefront of things, we are going to be the holistic solution for auditing everything in a company. Starting with expenses, we’re just taking it around to all the other verticals in the company.
Cem: Yes, procurement also sounds very similar.
Anant: It is something that our customers keep asking us, it is just matter of time when we start focusing on it but that’s where every customer keeps asking us, well if you can provide the same tools that we have today for invoices for procurement.
Cem: Great, thank you very much for your time.