PRGX Global, Inc. (PRGX-NASDAQ)

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June 4, 2010 Issue

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With A New Name And Focus On Being A Professional Services Company, PRGX Global, Inc. Has Launched ‘Profit Discovery’ Services Across Audit, Analytics And Advice – All Aimed At Increasing Client Profitability

Services
Business Services
(PRGX-NASDAQ)
Our industry classification per S&P’s GICS (global industry classification standard) hierarchy is “Data Processing & Outsourced Services” (Sub-Industry 45102020). Companies in this space are providers of data intensive services and also include back-office outsourcers. Peer companies in this space include Axciom (marketing data and analytics services provider), infoUSA (provider of data for US consumers and corresponding analytics services), EXL services (provider of outsourcing and analytics services primarily offshore), Genpact (a provider of BPO and analytics services), Fiserv (process outsourcer focused on mid-tier banks) and Convergys (a large outsourcer).

Romil Bahl

President & CEO

Romil Bahl was named PRGX’s President and Chief Executive Officer in January 2009. Prior to joining PRGX, Romil was one of the founders and a managing director of Infosys Consulting, the management consulting business started in 2004 by Infosys Technologies, a publicly traded global technology and consulting services company. He also led Infosys’ global System Integration business from late 2007 until he joined PRGX. Mr. Bahl ran the global consulting services business of EDS, and he also held a number of senior roles at A.T. Kearney, last serving as the leader of the firm’s European strategic technology and transformation practice. Mr. Bahl began his career at Deloitte Consulting. He holds an M.B.A. from the University of Texas at Austin and an undergraduate engineering degree from the Directorate of Marine Engineering and Technology in Calcutta, India.
 

Company Profile:

Headquartered in Atlanta, Georgia, PRGX Global, Inc. is pioneering "profit discovery," the combination of audit, analytics and advisory services to improve client financial performance. PRGX remains the world's leader in recovery auditing. It serves a majority of the top 50 global retailers and many other leading companies, and is active in an expanding range of markets, including healthcare. Until January 2010, PRGX was known as PRG-Schultz International, Inc.

PRGX Global, Inc.
600 Galleria Parkway, Suite 100
Atlanta, GA 30339-5949
Phone: 770-779-3900
 

Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published – June 4, 2010

CEOCFO: Mr. Bahl, what was your vision when you became CEO, and where are you today?

Mr. Bahl: The reason I took the position a little over a year ago was three-fold. First, I love the fact that this company PRGX Global, formerly PRG-Schultz, has a terrific economic business model or value proposition for clients as we have the confidence to go in and deliver real value purely on a contingent basis. We find and recover overpayments that have been made by our clients to their supplier/vendor base, and in turn, receive a percentage of the total recoveries. It is hence an ‘easy-to-sell’ value proposition for both good times and bad. Second, there was a terrific opportunity to transform the company into more of a professional services company in terms of our outlook and ability to serve our clients on a whole variety of issues focused on bottom-line financial performance improvement, thanks to the fact that our clients trust us with their mission-critical data in order to provide our core service, which is recovery audit. The third point I would say is there are some very good people here and a terrific board of directors, which I felt like were a real asset for the company.

CEOCFO: What industries do you focus on?

Mr. Bahl: We are mostly consolidated in to retail right now, and our next significant industry that we are especially excited about is healthcare. However, we are also expanding our target segments in to non-retail, non-healthcare industry segments, which we collectively call the ‘Commercial Sector’, where the company has had success in the past.

CEOCFO: Why is there such an opportunity for you?  Is overpayment on procurement prevalent?

Mr. Bahl: It turns out that there is a tremendous amount of complexity in today’s procurement and payment environment, especially in retail and healthcare. In those two industries, there are many moving parts. There are so many people involved in a purchase transaction, that it doesn’t matter how good the technology gets, or how qualified the people who process the transactions are, there is going to be some leakage. However, in most cases, it is not really ‘leakage’, because it is not simple errors any more. It is about understanding the intent of each deal, the intent of the contract, the intent of the promotion, and then auditing whether that ‘intent’ was followed through on by all parties. Our retail clients, as we like to say, ‘get it right’ 99.9% of the time. Yet that 0.1% percent of revenue that we are able to find is significant enough to make an entire business around it, because these retailers and healthcare payers spend so much money.  And that is what the recovery audit industry is all about.

CEOCFO: Give me a sense of what the process is when you go into a company; is this a one-shot deal?

Mr. Bahl: Because we are now mostly consolidated into retail and healthcare, we are in a situation where most all our client work is long-term deals. In fact, we have served the vast majority of our customers for over a decade and in some cases over two decades. In the case of our largest client, which is Wal-Mart, it has been over three decades. That is how long our relationships go, but that does not mean that this is not a competitive industry. In fact, many clients choose to run some kind of formal procurement or RFP process every few years. It is a sticky business because of the knowledge of clients’ processes, their systems, and of course, the nature of the opportunity. In non-retail, non-healthcare type environments, it is not always possible to find enough money to make it a worthwhile exercise every year. Therefore, our company had largely exited those industries over the last few years. We are going back in there now, but with a highly automated value proposition and capabilities that we believe will allow us to effectively and profitably serve those customers, as there exists very real demand for our services. Therefore, in commercial, we will do it with a better model and maybe do it every other year to make it worthwhile, but in our core industries of retail and healthcare, it absolutely is an all-year, annuity type business.

CEOCFO: What other services can you provide for your clients?

Mr. Bahl: We ran a robust strategy process after I got here as you might expect. As a part of my initial ‘100 Day Plan’, we launched a strategy process and finished around the 3^rd Quarter or so of last year. Our essential premise is that first and foremost, the core accounts payable recovery audit business can again be a growth business. We had no sales force when I took over, and there was a real need to transform our business model, so we are working on both those things, but we can absolutely turn the core business into a growth engine again.

Secondly, the healthcare recovery auditing market we believe is in its infancy. For example, if you look at the trillion dollars the government pays out through Medicare and Medicaid programs alone, there is only about $300 Billion of that which is currently contracted out for recovery auditing. This is for Part A and Part B of Medicare, which is all that is covered under the RAC (Recovery Audit Contractor) Program which was awarded by the Centers of Medicare and Medicaid (CMS) in 2009. We are a part of that contract in three regions. We serve 11 states as the comprehensive recovery auditor and then we serve 24 other states with a smaller set of services, so that will be a growing contract for us as we ramp up to full scale by the middle of 2011. However, the exciting news about healthcare is that the other $700 Billion dollars that is spent by the government is going to come on line for auditing, and in fact, it was included in the Patient Protection and Affordable Care Act, enacted in to law in March 2010. We are very well positioned to compete for that business as it comes up for recovery audits. Finally, the private sector is another trillion dollars that needs attention and auditing on a contingent basis just as we provide, and we believe it is a relatively underpenetrated space. In a nutshell, healthcare is a huge growth lever for PRGX.

Our third exciting growth lever is what we call ‘Analytics + Advice’, and I refer you back to an earlier part of our conversation today: to run a recovery audit, we get every bit of data from across a client’s procure-to-pay value chain. So we get contract information, we get every purchase order our clients have placed, we get buyer records, e-mails, and just a ton of accounts payable-type information, every invoice, shipment, receipt information, and then every payment. In some cases, we also get the point of sales data, because there is so much direct distribution to stores that goes on in retail. Therefore, it is really an audit of a retailer’s entire transaction volume. We get about 1.5 million files from our clients every year, and at any point in time our systems have over 4 petabytes, or over 4,000 terabytes, of client information. Therefore, our clients entrust us with one of their key assets, and we believe we can mine that data for more than just over-payments. We think there are hidden insights in our clients’ data around indirect procurement and strategic sourcing, around direct merchandise category profit improvement, around fraud and compliance issues, etc. that we are bringing to bear through our business analytics service line. Then, much like we do in the recovery audit space, we have put a service around the discovery of those actionable insights that will drive profits to the bottom line for our clients. That is really the growth strategy across those three levers.

CEOCFO: How much is in the technology and how much is people when you are reviewing the various items?

Mr. Bahl: In our core recovery audit business, it is both technology and people.  You really cannot do without people for the simple reason that as good as our IP gets (and our global algorithms are absolutely cutting-edge), when it comes to the more complex auditing, it does require some level of manual intervention and expertise. So we look to the experience of our teams that are at our client.  It is these teams who guide our entire business intelligence operation. These experienced auditors know where the client’s business has changed, what new product lines have been introduced, what new stores have been opened, where discounting has happened, and where systems changes have happened that might have caused errors, etc. So based on this intimate knowledge of the client and our expertise around their procure to pay processes, an audit plan is built. This ‘audit footprint’ for the year is what is used to direct the slicing-and-dicing of the data. It is first a massive technology operation to extract-transform and load our clients’ hugely voluminous data in to our central warehouse, and then we run our IP, a series of client-specific and global algorithms. Then it becomes a more complex auditing process using people expertise to analyze and interpret the outputs. Typically, our auditors have twenty plus years of experience, ten plus years of which is with us and ten plus years either in the finance and accounting/accounts payable department or the procurement department of a large retailer for example. Therefore, they know how these processes work and where the overpayments typically occur.

CEOCFO: Would you tell us about the recent acquisition, and do you see more in the future?

Mr. Bahl: Yes, we have done two acquisitions in my time here; one in July or so of last year (2009), and one more recently as you mention. The more recent acquisition we completed was of a small company called Etesius, which was a UK based company, but one that has punched well above their weight in terms of having a world class spend analytics tool. What we loved about their little team was the cultural fit: for example, their founders had a PWC background, so they know professional services. One of their founders used to run the recovery audit practice for PWC and the other used to be one of the leaders of the analytics practice. So they know what we are all about, what data we get, and how to work with that data. They have accelerated our spend analytics and indirect procurement value proposition, one of those high value ‘analytics + advice’ ideas I mentioned to you earlier. They accelerated that idea to market by at least 24 and maybe as much as 30 months. If we had built that tool from scratch, put a team together, even if you had done so cheaply in India or wherever, it would have taken us a while to get a beta version out and then stabilize the code. In short, we would have bumped and bruised our knees along the way, but by doing it with a strategic acquisition, we have a robust tool on day one, and we have a leadership team that adds to the muscle of our overall team, and really gets us to market basically on day one.

CEOCFO: What is the competitive landscape like?

Mr. Bahl: The majority of our competition is very locally oriented. We are the only global player in recovery audit. Our largest competitor is not surprisingly in our largest market, i.e. the US market, where Connolly Consulting and Apex Analytix are the key competitors. However, internationally, it is usually small companies. Even here in the US, if you take out the big three that I mentioned, you then have a couple of companies in the $15 or $20 million range, followed by  a whole host of 75 or 80 other companies, many of which are literally one-client companies.

CEOCFO: Do you do much internationally and do you see that as an area of growth?

Mr. Bahl: We do a lot internationally and in our core AP recovery audit business, our international revenue is approximately 50% of the total, and could be more than fifty percent because it is growing. Just this quarter, our international business grew 30% over the same quarter of the prior year. Part of the reason that this is happening is that there are still some international retailers that do not really have recovery audit going on yet, so we view that as a tremendous opportunity.

CEOCFO: With your newer services and the potential in healthcare, how do you stay focused?

Mr. Bahl: It is certainly a question we have asked ourselves, i.e. ‘are we biting off too much to chew?’ I will just tell you that the way we have managed to stay focused is by staying very true to real adjacencies, i.e. to our recovery audit business and our current assets and history. Howard Schultz founded the recovery audit industry back in 1970 and Profit Recovery Group and Howard Schultz Associates merged to become PRG-Schultz along the way. So we know how to do recovery audit – we are the pioneers. It follows that applying this recovery audit capability, and our business intelligence and analytics mindset, to healthcare is really just an extension of recovery audit. The difference is that healthcare is opening up and motivation especially at the government level is opening up over the next few years and that is what makes the space very interesting. Of course, there are some new capabilities needed, so we have a medical director now, an M.D., nurses and clinical coders on staff instead of people that know retail buying. In short, while there is some difference in the skill and profile of the people, it is essentially the same post payment recovery audit work.

The analytics + advice area is admittedly a new skill set area for us, but I would argue that these services are a competitive necessity even to stay in the core business. This is because CFO after CFO that I met during my first months on the job each told me, “this is great, you are going to recover us money, but frankly when you come and start talking to me and show me the millions of dollars you are recovering for me every year, it just causes pain, because it tells me that we are losing this money in the first place. You have to add services that simplify our business, you have to add more value, and find a way to help fix the root causes of these errors, as well as add more value through the amount of access that you have to our processes and our information.” So we are basically listening to our clients and saying to ourselves that if we stay recovery auditors only, we will be replaced by the cheapest recovery auditor who can tell a good story. However, if we can deliver on the promise of ‘audit, analytics and advice’, which is our new go-to-market mantra, we will have a customer for life, because we are helping them across a whole series of opportunity areas. We are hence committed to identifying the reasons why recoveries are happening, and then helping our customers close those gaps. We are then able to identify additional sources of value for that customer and deliver services around them. Frankly, we are viewed as a trusted partner who is helping them make a change, as opposed to the ‘mercenary recovery auditor’, who looks for recoveries and hopes that the errors are never fixed, so that the same recovery claims come out again next year – the kind of mentality that some of our competition continues to exhibit.

CEOCFO: What is the financial picture like for PRGX Global today?

Mr. Bahl: Our revenues last year were about $180 million. We are profitable, our EBITDA margins are in the mid-teens percentage range. Our balance sheet is very strong, we have over twice our debt in cash on the books and so we could pay off debt tomorrow if we wanted to… however, we are keeping our powder dry to invest in any acquisitions and certainly in some of the OpEx investments and CapEx investments around tools and the analytics style propositions that I talked about earlier. We announced late last year that we were embarking on a massive transformation and investment program, investing an incremental $20 million back in to the business, which is reflected in our EBITDA results in the 1^st Quarter and will be for the next four to five quarters. We strongly believe coming out of that investment period, there will be several key value propositions we will be taking to market, and it will make us a very exciting growth story in the future.

CEOCFO: In closing, why should potential investors pick PRGX Global out of the crowd?

Mr. Bahl: Simply put, it is the first time a company is combining Recovery Audit services with Business Analytics and Advisory Services. We have named this category ‘Profit Discovery’. This is why we are an exciting growth company, with our Audit-Analytics-Advice capabilities all focused on improving client profitability. We are willing to take a percentage of actual tangible results as opposed to other consulting firms who are mostly selling value propositions where beauty can be in the eye of the beholder. On the other hand, analytics companies do not have a recovery audit angle with real bottom line benefits. For us, it is entirely about client profits: we discover our clients’ hidden profits, and we are doing so by transforming entirely in to an information-based services company.

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The reason I took the position a little over a year ago was three-fold. First, I love the fact that this company PRGX Global, formerly PRG-Schultz, has a terrific economic business model or value proposition for clients as we have the confidence to go in and deliver real value purely on a contingent basis. We find and recover overpayments that have been made by our clients to their supplier/vendor base, and in turn, receive a percentage of the total recoveries. It is hence an ‘easy-to-sell’ value proposition for both good times and bad. Second, there was a terrific opportunity to transform the company into more of a professional services company in terms of our outlook and ability to serve our clients on a whole variety of issues focused on bottom-line financial performance improvement, thanks to the fact that our clients trust us with their mission-critical data in order to provide our core service, which is recovery audit. The third point I would say is there are some very good people here and a terrific board of directors, which I felt like were a real asset for the company. - Mr. Romil Bahl

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