A Recoverer’s Recovery

Anticipating huge growth from the new health-care law, an auditor of overpayments boosts its capital expenditures.

In times of slow growth like the present, efficiency itself can be a growth industry. Few finance chiefs are in a better position to understand the need to make the most out of their companies’ operations than Bob Lee, CFO of PRGX Global.

There are two main reasons for this. One is that PRGX is in the business of auditing the transactions of retailers, other corporate clients, and governmental agencies to help them recover overpayments. The second reason is that the company has a history of fruitful rightsizing. By 2005, after more than a decade of acquisition-fueled growth, PRGX found its cash flow sputtering and its revenue declining. That led to a massive round of cost-cutting from 2005 through 2007, during which time the company trimmed about $50 million of its overhead. The cuts more than matched a $25 million decline in revenue, helping the company to transform its cash-flow status from negative to positive.

Efficiency, however, has its limits. Such shrinkage “was not sustainable,” says Lee, because it didn’t account for PRGX’s need to at least maintain market leadership. Thus, the company changed its strategy and has been investing in capital expenditures and the expansion of its sales and business-development staff. Certain provisions of the health-care law signed by President Obama last year are also sparking high hopes for growth at the company.

In a recent interview with CFO, Lee expressed excitement about the company’s efforts to meet an April 2011 deadline for submitting requests for proposal to provide recovery services for state Medicare and Medicaid services. An edited version of the interview follows.

How do you find your clients’ overpayments?

Once we’ve executed a contract with a client, who might be a CFO for a major retailer, for example, we’ll send in our data-acquisition specialist and talk to the company’s buyers and merchandisers and fully examine its entire procure-to-pay process to identify the exact data we need. We will tell the CIO how to best give us that data.

Bob Lee of PRGX

The data comes from deal sheets and purchasing, receiving, and disbursement records. Nowadays we also get point-of-sale records because there’s a lot of allowances and deals made around that data. Most recently, we’re started to get the buyers’ e-mail data, because we have tools to examine that e-mail for deals made. At any given time, we have about 4 million gigabytes of data in our systems. We typically look at about 1.5 trillion transactions a year. On average we’ve recovered about $1 billion a year for our clients for the past five years.

How does PRGX earn its keep?

We work on a pure contingency basis, and get paid percentage fees based on what we find. If we don’t add money to our clients’ bottom lines, then we don’t get paid.

In the old days, the audit-recovery business focused on duplicate payments; that is, the client paid an invoice twice as a result of keying errors or simple misspellings. That was the original business model. Those types of errors are now less than 5% [of the total found], because of upgrades in the types of errors we find. What we now find is closer to the contract-compliance area: missed allowances, missed discounts, missed inclusion of certain families of products that should have been included.

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