ED H. BOWMAN, JR. - F.Y.I. INCORPORATED - (FYII)
CEO Interview - published 10/02/00

DOCUMENT # KAX609

ED H. BOWMAN, JR. is President, Chief Executive Officer, and a Director of F.Y.I. Incorporated, a publicly held information management company headquartered in Dallas, Texas. F.Y.I. has been honored in Forbes, Fortune, and BusinessWeek as one of the best and fastest growing companies in America. F.Y.I. is a component of the Russell 2000 Index and the S&P Small Cap 600. From 1993 to 1995, Mr. Bowman was Executive Vice President and Chief Operating Officer of First Data Corporation’s Healthcare Systems Group in Charlotte, North Carolina, where he was responsible for company operations, including planning, research & development, marketing, and customer service. From 1983 to 1993, Mr. Bowman held several executive positions with HBOC, a leading healthcare information systems company based in Atlanta, Georgia. Mr. Bowman’s titles included Vice President International, Vice President Marketing & Business Development, Senior Vice President U.S. Customer Service Operations, Group Senior Vice President Research & Development and National Support, and finally, Executive Vice President and Chief Operating Officer. Mr. Bowman was with Andersen Consulting in Atlanta, Georgia, for 10 years, where he consulted on leading information systems and technology projects and was elected to the partnership. Mr. Bowman serves on the Georgia Tech Advisory Board, the Advisory Board to the President of the Georgia Institute of Technology. He also serves on the Advisory Board of the Robinson School of Business at Georgia State University, concentrating on e-business and entrepreneurial activities. Mr. Bowman served on the Advisory Board of the Advanced Technology Development Center at Georgia Tech and has been an investor, advisor and Board member of several technology companies. Mr. Bowman is a Board member of 711.net, an Internet company. Mr. Bowman earned his MS degree from the Georgia Institute of Technology, and a BBA degree from Georgia State University. He earned his CPA certification in 1973.

Sector: Photography & Imaging

TWST: Could you provide our readers with an overview of F.Y.I., including its history, development, markets, and your view of the company’s future potential?

Mr. Bowman: We initially began F.Y.I. with the goal to create a national, single-source provider of outsourced document management services. This was a new concept in this industry, which at the time was highly fragmented, with over 3,500 small private companies; there were no large players dominating the industry. We felt strongly that there was a need in the marketplace for a company to serve as a one-stop shop that could provide a broad array of document management services to customers nationally. Our objective was to create an industry leader that could drive significant value to customers, as well as investors. The result was F.Y.I. We began operations in 1996 and focused on basic document management services, such as electronic imaging, document conversion, data capture, and document storage. Since 1996, there’s been a significant transformation of the company. Our initial emphasis on basic document management services has expanded and now encompasses a number of new offerings through which we provide value-added customer solutions. We’ve added a number of enabling technologies to support higher-level information management capabilities, such as a new offering that we’re very excited about, our electronic document repository, known as fyidocs.com. We’ve also introduced new database services to support higher value-added applications. We provide consulting and systems integration services, and we’ve introduced a new level of services we call integrated solutions, through which we provide complete business process outsourcing for our customers. For example, through our F.Y.I. LEGAL offerings, we have created a turnkey solution for claims administration of the settlements of class action cases. Following adjudication or settlement, we utilize our database management expertise to construct a database of potential class members; we conduct a notice campaign using direct mail to contact the claimants with a printed notice and claim form. We then process the returned claims materials and administer the payment of the claims. We have in-bound call centers to handle class member’s questions and payment administration. In one case alone, we administered a $2 billion settlement involving more than five million class members; by bringing together a combination of our services and database management capabilities, we are able to provide a complete end-to-end solution that can accommodate cases of all sizes. Initially, by design, F.Y.I. achieved much of its growth through acquisitions because we wanted to rapidly create a footprint of operations in specific segments and geographic markets. We established a leadership position and achieved the scope and scale to deliver as a national vendor in those markets. Today, we are focusing more on internal revenue growth and operating margins. Both internal growth rates and the margins from our business have improved consistently every year since we began operations. And we expect that to continue in the future as we successfully integrate acquisitions and consolidate operations. In the future, we will continue acquisitions, and they will be part of the ongoing build-versus-buy analysis that we undertake as we continue to address the markets we serve. During this period, we’ve grown tremendously to become an industry leader. We began operations in January 1996 and have grown the business to $450 million in annual revenues. We have more than 10,000 employees and 140 locations throughout 40 states, Washington, DC, Puerto Rico, Mexico, and the Grenadines. We’ve received recognition of our leadership throughout the marketplace as well: F.Y.I. was added to the S&P Small Cap 600 Index in January 2000 and is also a component of the Russell 2000 Index. In 1999, and for the second straight year, F.Y.I. was recognized by Forbes magazine as one of the 200 Best Small Companies in America, based on return on equity, sales growth, and EPS growth. This follows a recent issue of Fortune magazine naming F.Y.I. as one of America’s 100 Fastest Growing Public Companies. Finally, we see tremendous potential for the future of our business. Our marketplace has grown to over $15 billion today; that represents only the value of services that have been outsourced. There’s still the largely untapped market represented by these services performed by businesses in-house, which is four to five times larger than the outsourced market. The demand for outsourcing continues to expand as companies continue to focus on their mission critical operations. And, as demonstrated by our performance to date, we are confident in our ability to continue to innovate, to create new solutions for our customers and to take advantage of changes in the marketplace as they occur.

TWST: Who are the customers for your services?

Mr. Bowman: We have a very diversified base of more than 4,000 customers across many industries. We serve clients in information and document-intensive industries such as financial services, healthcare, legal, insurance, and government. For example, financial services is a big market for us, serving a broad base of customers including banks, mortgage companies, credit unions, and credit card companies such as Bank of America, Wells Fargo, Countrywide Mortgage and American Express. We’re a leader in serving the insurance industry, with customers such as The Prudential and United Healthcare. In addition, we provide information management solutions to more than 3,000 health care providers and our client base reads like a Who’s Who of the major hospitals, teaching institutions and major clinics in the country, as well as the Veterans Administration. We have customers in the transportation industry, including many of the major airlines and overnight delivery carriers such as United Airlines, American Airlines, and FedEx. We also do a lot of business with high-tech firms, including computer manufacturers, software companies, as well as B2B companies such as Microsoft, 3Com, Compaq and EarthLink. The state and local government market has been very good for us with major relationships with agencies such as the New York State Workers Compensation Board, where we have a $30 million, five-year contract. We also do quite a bit of business in the consumer market, with household names such as Kmart, J.C. Penney, and Taco Bell. Our customers are in information and document-intensive industries. We manage the critical flow of documents and data that comprise their business information. More and more, we are contracting for longer-term relationships with our customers and are attracting the larger companies in each of the industries we serve. Our business has very low customer concentration: no one customer today accounts for more than 3% of our overall business. The bottom line is we’re highly diversified with a large customer base, which provides operational and financial stability.

TWST: Why would these companies outsource these functions?

Mr. Bowman: Companies are increasingly outsourcing certain functions of their business so they can focus on their core business strategies and operations. Often the outsourced functions are critical to accomplishing their mission and they need a company, like F.Y.I., that has a specialized core competency in providing a particular service. Many companies also want to streamline their vendor/strategic partner management to actually reduce the number of vendors they must manage. This is an advantage for F.Y.I because the customer needs a partner that can take accountability for an end result of an integrated solution. As a single-source provider of multiple services, F.Y.I. can fulfill this need. Cost savings is often a driver, but increasingly, companies want to meet multiple objectives and achieve competitive advantages by outsourcing, such as increasing employee productivity, improving customer satisfaction or generating incremental revenue. The value proposition of most outsourcers is that they can perform a function faster, better and more cost effectively than the customer, while letting the customer focus on their core business. At F.Y.I., we compete on this basis, but we have created additional competitive advantages because we provide capabilities and add value beyond just competing on price, quality and speed. We assist some of our customers in rationalizing their acquisitions by reducing the number of vendor relationships they must manage. In fact, companies growing by acquisition provide us with an ideal customer profile because we have the operational footprint in place where we can deliver on a national basis. We have the capacity to handle very large volumes, which is critically important. We have 140 locations throughout the US, Mexico and the Caribbean, with more than 10,000 employees — one of the largest service platforms in the industry.

TWST: Who are you competing with in this space?

Mr. Bowman: Most of the competition is still the in-house alternative, given outsourcing is in its early stages. But once you get beyond that, most of our competitors are private, local companies. It’s a highly fragmented industry, with over 3,500 small businesses — and because of the significant service platform that we’ve built, we have created a competitive advantage.

TWST: As you look at the marketplace, how do you expect it to change over the next two or three years?

Mr. Bowman: First of all, I think we must acknowledge the impact that technology is having on the market – the Internet, the B2B thrust that is taking place. There’s really a changing paradigm on how businesses think about their own business model. So emerging technology is definitely presenting new opportunities for our business. We’ve planned for that in a number of ways. One is through the introduction of our new electronic document repository. We’re seeing new demand from customers who want to convert their documents into electronic form and have them available on a repository that they can access from anywhere within their enterprise, or anywhere in the world. Companies are also seeking to provide selected information to customers electronically and to open their internal business processes to their key business partners to increase levels of business collaboration. This often requires sharing of information and documents across company boundaries. We’re excited about our new repository offering, which serves as the backbone for this business collaboration. Another change we’re seeing in the market is more of a move to content management – that is, managing both data and documents. Much of the true knowledge in a company is resident in documents, as opposed to data, so that’s why businesses want access to the documents in flexible, processable formats. Customers also want to do business with a strategic partner who they can count on to grow rapidly with them; to make the investments in service capabilities to grow and support their business. Well-capitalized companies like F.Y.I. become the selected partner because we can fund investments and also recruit the talent and knowledge to deliver high-value services. This is an important development in the market. Finally, the trend toward outsourcing just continues to accelerate. More and more companies are taking functions outside of their business and giving it to partners with whom they feel comfortable. We’re seeing larger contracts and longer-term arrangements as an outcome of this development. We think that these changes will allow us to continue to grow the business.

TWST: Can you explain the electronic document repository a bit further?

Mr. Bowman: We have just introduced a new service offering, our electronic document repository known as fyidocs.com, a robust, scalable offering to enable e-business. This new offering adds electronic object storage and Internet-based retrieval capabilities to complement our industry-leading data capture and document conversion services. Through this combination of technology and services, customers can rely on F.Y.I. for universal, secure and timely access to digital documents. Industry analysts expect the marketplace for document technology to grow to more than $23 billion by 2003, producing a compound growth rate in excess of 32%. As business services continue to migrate to new storage platforms, managed electronic document repositories serve as a backbone for their networked applications. F.Y.I. currently offers nationwide document conversion capacity of more than four million images per day, which is available to provide content for the fyidocs.com repository. So it is a natural extension of our core conversion competencies to offer the storage and retrieval capabilities. The fyidocs.com system is designed with leading-edge technology. Utilizing high bandwidth telecommunication lines, data and images are sent to a hosting facility where the electronic information resides on a highly redundant storage area network utilizing fiber-channel RAID 5 storage arrays, helping to ensure optimal access to the information. The fyidocs.com system can offer highly reliable end-to-end security, including data capture, conversion, hosting services, storage and retrieval. We offer both the conversion services to convert traditional documents into processable digital formats and the integration services so that the retrieval function works seamlessly with our customer’s business process applications. F.Y.I. is uniquely positioned in the industry to provide these types of end-to-end solutions for our customers. By the way, we are delivering these solutions today. We recently signed a contract with a leading financial services company where we are imaging about 300,000 documents a day. We already have 20 million images available with this customer, so we’re going to add to that at the rate of 300,000 documents per day, populating a very large document repository and making it accessible to them throughout the country. We have a number of other customers we’re currently talking to that have a similar interest. That’s going to be one of our big growth engines going forward. We have seen strong demand from our customer base to provide a robust platform and services for the data supporting their business information processes that can serve their entire enterprise. This will become even more critical with the rapidly increasing deployment of Web-based applications. In summary, with fyidocs.com, combined with our industry-leading conversion services, we provide an end-to-end total document repository network to provide conversion, systems integration and storage retrieval solutions that can meet the comprehensive needs of larger enterprises. We are on track to introduce this service to both current and new customers of F.Y.I. across all four of our business units beginning this fall, after we complete our pilot project, which is currently in process.

TWST: Turning to your contractual relationships, typically how long are the contracts that you’re working with?

Mr. Bowman: Approximately 65% of our revenue is under contract or is recurring for a year or more. We’ve recently signed several three-year contracts and five-year contracts. We are finding that our customers want a long-term commitment from their strategic partners, like F.Y.I. We also continue to have a number of one-time projects that are less than one year in duration and have a defined beginning and end.

TWST: Are there any barriers to entry in this business?

Mr. Bowman: Yes, I see a big barrier to entry now. If you want to be a major national player and attract national customers, you need broad geographic coverage in multiple locations; you need those locations interconnected so that you can share workload. You need backup and recovery capabilities in multiple areas of the country. You also must have large capacity at multiple price points and the technology to process large volumes at highly competitive prices. You must be able to attract and retain the management and technical talent to innovate in an environment driven more and more by technology. So we’ve assembled that operational footprint and set of capabilities and are the leader in the industry right now. I think this is a huge barrier to entry if you want to be a national player. It would be very difficult and take a very long time for anyone to now assemble what F.Y.I. has put together in the last four and a half years, so I think there’s a large competitive hurdle for others to overcome.

TWST: How would you describe the strategy that you’re going to follow over the next two or three years?

Mr. Bowman: We plan to continue to focus on internal growth strategies, combined with strategic business acquisitions. We also develop strategic alliances to round out solution capabilities and create new channels of distribution to drive revenue growth. This is a smart way to quickly capitalize on business opportunities while minimizing risk associated with rapidly changing business trends and technology. There are a number of strategic alliance candidates who are interested in partnering with F.Y.I. to gain access to our substantial client base and to utilize our services to complement their offerings. We are developing more of our business around scalable technology-based service platforms. A good example I discussed earlier is fyidocs.com, where we have developed the capability to image documents on behalf of our customers and populate the electronic document repository from any one of a number of locations throughout F.Y.I. for Web-based applications. This is one example of our ability to scale the business around technology. You’ll see more and more of that. We have always been service-driven. As a result, with our expansion of technology-based service platforms, portions of our business are beginning to look more and more like an ASP than we did when we first started operations. As we build out shared technology platforms that can be used by multiple customers concurrently, this ASP model is developing inside F.Y.I. One of the advantages we have is a substantial customer base in which we are capturing and imaging documents, and it’s a natural extension to our business to provide the repository and processing, with new applications, for our customers. Because we are already in the flow of literally hundreds of millions of documents a year and massive amounts of data, it’s a natural way for us to become an ASP, to generate profits and substantial cash flow every step of the way.

TWST: You indicated your growth plans, which are rather substantial. Do you have the structure in place to allow you to get there?

Mr. Bowman: In any fast-growth environment, you always have to constantly invest in infrastructure, systems, controls, and grow a solid management team. We’ve grown to $450 million in the last four and a half years in a controlled manner. So that’s something we are very accustomed to and have done well. We also have the capital and financial resources to fund our growth. We are comfortable that we will have the infrastructure in place to manage our growth, provide additional services and generate the incremental revenue we expect through 2001.

TWST: The growth rate you talked about, is that all organic, or does that include some additional acquisitions?

Mr. Bowman: To achieve our goals, it’s a combination of internal growth as well as strategic acquisitions and alliances. Much of our focus is on internal revenue growth, including new services such as fyidocs.com. It is important to note that our internal growth rates have increased each year since we began operations. We have invested in our sales force and have been successful at contracting for large, longer-term relationships as a result of our national sales efforts. We believe that in today’s world, where you have to move rapidly to put capabilities in place, it’s sometimes a better strategy to acquire or develop alliance partnerships than it is to build internally, avoiding some risks — the losses of a start-up, the risk of recruiting a new management team, technology team, or sales force. Any new acquisition would have to be a strategic acquisition to enter new geographies, to provide new service capabilities or expand on existing capabilities. Often, if you can find a strong company and see a track record of successful performance, it’s a lower-risk strategy to acquire than it is to build. We have the capability to do both, and we’ll continue to do both, as we evaluate each decision on a build-versus-buy basis.

TWST: When you look for acquisitions, are you looking for new geographies or new business segments?

Mr. Bowman: Actually, both. Initially, we looked at new geographies and building capacity in existing markets because we wanted to establish a footprint in specific markets and build critical mass rapidly. Now we are also identifying new services that are complementary to our existing services. This is a key part of our solutions orientation to continue to bring new capabilities to the company. For example, approximately 30% to 40% of our revenue is derived from new services that were not even being considered at the time we began operations four and a half years ago. In the future, we will add new services as well as new geographies.

TWST: So you’re responding to what’s going on out there on a regular basis.

Mr. Bowman: The markets are changing rapidly; the competitive environment is changing rapidly; technology is changing rapidly. We are constantly evaluating market opportunities and changes in technology. Each year we see several hundred acquisition opportunities and are in direct touch daily with leading companies that are our customers; we are in touch with the market. We have to be fast on our feet, be good at evaluating markets, and be good at capitalizing on opportunities. We have a plan. But within that plan we are opportunistic, as well.

TWST: What are your biggest long-term opportunities?

Mr. Bowman: The biggest opportunities are in enabling technology and services like our electronic document repository, fyidocs.com, because of the huge underlying demand from customers who want to have those documents in electronic form and take advantage of the new paradigm that the Internet has brought. But there are also other catalysts for growth where we are making investments this year. For example, we like the prospects for our class action claims administration business, our state and local government business and our potential business with the Veterans Administration (VA). The VA is a good example of how we serve customers and take advantage of market opportunities. We signed a multi-year, multi-million dollar contract with the VA in Palo Alto to image medical records and host a repository at F.Y.I.’s service center that is now connected to the VA’s local area network, enabling a caregiver (physician or nurse) to retrieve and view an image of the medical record at the point of care, across eight facilities and 800 workstations. We also wrote all the application code so the images could be viewed using a browser interface. This solution has been operational for several years and is saving the VA significant money while assuring high levels of medical record availability, electronically, across the enterprise, that was never possible to achieve before. Because this success has become visible in the VA, other units now see the benefits of the solution. Within the VA, there are 22 VISNs (Veterans Integrated Service Networks), each composed of several health systems, and each health system composed of a major VA hospital and several clinics with large outpatient volumes. Palo Alto, where we have our solution installed, is one such health system. So I think there is big opportunity to implement this proven service offering in other VA locations, and we have had recent success in doing so. We recently signed a master contract with VISN 21 (one of the 22 VISNs) allowing all the health systems in the VISN to buy off a standard contract. We recently added the northern California health system, representing six additional facilities. There are 16 more facilities in the VISN 21 that could still contract for the service. Then, of course, there are 21 other VISNs nationally, representing a huge opportunity for both F.Y.I. and also the entire VA because the financial and qualitative benefits to the VA are enormous. In summary, we have a number of catalysts for growth, and I have mentioned only a couple of them here to provide an example of why I am so enthusiastic about F.Y.I.’s solutions approach to the market and the opportunity that creates for future growth.

TWST: Do you have the management team that you need?

Mr. Bowman: We have a strong management team in place and that is one of the significant competitive advantages of F.Y.I. In the last six months, we’ve added several new members to the team who bring new skill sets to help us manage our growth. In a growth company of our size, we have to constantly add and develop new management. So yes, we have our team in place that’s going to carry us forward, but we’re always looking for talented management to recruit while developing the very good management we have at F.Y.I.

TWST: As CEO of the company, where are you spending your energies right now?

Mr. Bowman: It’s shifted over the last few years. Initially, I spent much of my time putting the company together, focused on internal issues, like building the infrastructure, the controls, the systems, the management team and executing our plan. Time was also spent on acquisitions, integration activities, raising capital, shareholder relations and the overall direction of the company. But in the last six to 12 months, in particular, more of my time has been focused on external matters, including looking at new markets that we should enter, developing very large customers, dealing with new strategic partners who provide new sources of revenue for F.Y.I., dealing with the investment community and creating growth opportunities for the company. A lot of energy has also been devoted to recruiting and developing the management team that F.Y.I. needs to continue to grow.

TWST: Does that reflect the growing maturity of the company?

Mr. Bowman: It reflects the growing maturity of the company, and the fact that we have such a broad scope and scale of operations now. In January of this year we promoted Joe Rose to Chief Operating Officer. Joe is an excellent executive and has been with F.Y.I. since 1997, so he knows our business well. He has a strong background in both service companies and technology businesses and is focused principally internally, which frees me to spend more time externally and on strategy.

TWST: Given the rapid growth of the company, how would you describe the culture that you’re trying to develop there?

Mr. Bowman: You have to put it into a couple of categories. First, we are a very fast-paced, growth-oriented culture. You have to be when you go from zero to $450 million of revenue in four and a half years. Because of that growth, we have to stay very focused on the details, to build every element of the operating platform and infrastructure as we go to make sure we have predictable, controlled growth. Our culture is also heavily oriented around our customers. We are in the service business. We are an outsourcer. Everything good that happens around this company happens because of our people who serve our customers every day. So we’re very focused on customer service. We’re building the company around long-term recurring revenue, and the only way you can have that is if your customers are happy and you earn your stripes every day. The combination of rapid growth and customer focus translates into a culture of having to make sure that we attract, retain and develop quality employees. That’s very important. Of course, we have a very earnings-driven culture and recognize the importance of our shareholders. We’re focused on earnings-per-share growth as the principal financial benchmark of success. We have met or exceeded earnings expectations all 18 quarters that we have been in business. We also create strong cash flow and measure ourselves against other key metrics, such as return on equity. Finally, our culture is built on a foundation of total integrity with our customers, employees, shareholders and business partners. This is the most fundamental unifying principal in our culture and is paramount in building a successful company long-term.

TWST: How are you doing attracting the people you need to staff this operation?

Mr. Bowman: We think in terms of what I call the “war for talent,” because that’s really what it is. We have to be able to recruit and retain the brightest people available. We’ve had a lot of success with the management team and the knowledge workers in our business. We are becoming the employer of choice for people who want a career in this industry; because F.Y.I. has emerged as the leader. Because of our rapid growth, our people have career opportunities that would otherwise not be available in a slower-growth environment. So, for people who want to part of a leader, make a difference and assume a lot of additional responsibility, F.Y.I. is a great choice. We have invested in ongoing training and development, which is important to both our business and our employees. Competitive compensation packages are obviously important, with bonuses based on performance. But at the end of the day, you have to like what you’re doing, and feel like it’s furthering your career. So we provide a balance of both financial as well as non-financial rewards.

TWST: How do you feel about the state of your balance sheet at the moment?

Mr. Bowman: We feel good. We have a strong balance sheet, with the financial capacity to continue to fund our growth. We have very strong cash flow and are a very solid company financially. In fact, I would say that from a financial perspective we are the strongest company in the industry today.

TWST: How are you defining the industry and who else are you putting in that category? Who will you compete with in the future?

Mr. Bowman: The industry includes the highly fragmented industry, the 3,500 smaller companies, as well as a few public companies that have emerged in the industry. We will continue to compete with them. If you look to the future, we will continue to become more of an ASP model in portions of our business. If you compare us to ASP’s, or other technology-oriented service companies, we already have a solid, broad customer base generating significant revenues that make it easier for us to develop our ASP model or introduce new technology-based service platforms and still be profitable every step of the way.

TWST: How do you feel about the value the market is currently putting on your company?

Mr. Bowman: Today our stock is in the high 30s, which is less than 20 times current year estimates, and less than 17 times analyst’s expectations for 2001. Yet, our compound earnings-per-share growth rate over the last four and a half years has been around 28% and has exceeded our own internal goal of 25% each year. So we’re trading at a discount to our growth rate. In that sense, I think we are undervalued, particularly when you consider the fact that we have the best track record in the industry, and that we’ve been a very strong, consistent performer. Because of our size and scale, our growing momentum and the fact that we’re introducing new market driven solutions, I think we’re even more undervalued. If you compare us in the ASP segment, where those companies trade at a multiple of 4 to 5 times revenues or higher, we’re trading at maybe 1 to 1.5 times revenue. They’re not making money, and we are. So I think that as we become more of an ASP-oriented company, the market will discover that we are a very good investment.

TWST: Is that what you think is the differentiation in value now?

Mr. Bowman: I think the market still doesn’t fully understand or appreciate the significant transformation that has occurred and the capabilities we’ve put in to place, particularly in the last nine months. These capabilities allow us to leverage our existing service platforms and the new business models that are developing to provide high value solutions.

TWST: Is that because investors haven’t looked at these capabilities, or they just haven’t recognized it yet?

Mr. Bowman: It is new at F.Y.I. in the last nine months. We are still in the early stages of getting the message out. We’re still somewhat of an undiscovered story, but that is beginning to change rapidly.

TWST: Where is the operating margin today, and where would you like it to be?

Mr. Bowman: Operating margins today exceed 13%. When we started this business, we were around 10.8%. So we’ve already seen some margin expansion due to operations improvement, as well as revenue mix improvement. But we think we can drive that from 13% to 15% in the next few years.

TWST: What will it take to do that?

Mr. Bowman: It will take two things. One is a continuing change in revenue mix toward higher-margin services, which we’ve already done in the last couple of years. With services like fyidocs.com, our new electronic-document repository, we have the opportunity for margin expansion. In addition, margin expansion will be derived from consolidation opportunities within our current operations. We can take some fixed cost out of the business by consolidating facilities and taking advantage of purchasing power, where we negotiate much better deals with our vendors.

TWST: Where’s the risk in the story? What could go wrong at this point?

Mr. Bowman: Any time you’re managing a rapid-growth organization, one of the risks or challenges is that you’ve got to make sure you’re constantly building the infrastructure, implementing the systems, and have the management team to lead the rapid growth, and not let it get out of control. So that’s the risk. We’ve done better than anybody in the industry to date at integrating acquisitions and building infrastructure to support growth. So we’re very focused on solid operations every day. I think another risk is looking at the competitive environment: technology is changing rapidly, and the competitive environment is changing. We always have our radar screen focused on market demand, any changes in technologies or new competitors that may actually come in with a new approach to solving a problem. So we’re positioning ourselves to be innovative at a faster and faster rate to keep pace with true customer adoption rates for solutions. Finally, back to this “war for talent” point. We’re a service company. At the end of the day, it’s people who make everything happen, and all of our employees who serve customers every day are important. Our management team and key members of our staff who provide the leadership and lead the change are critical. Our ability to recruit, retain and develop that team is a critical success factor that will ultimately determine our level of success.

TWST: How sensitive do you think the business is to the general economy?

Mr. Bowman: Our view is that it’s not very sensitive to normal fluctuations in the economy. We’re diversified across many industries, so we’re not dependent any particular segment that may experience a general downturn. In any downturn, outsourcing actually tends to stay strong as companies look to reduce their internal cost structure. F.Y.I. provides critical business process outsourcing solutions that are necessary in all economic environments.

TWST: If you were sitting down with some potential longer-term investors, what two or three reasons would you give them to go out and invest in your stock today?

Mr. Bowman: F.Y.I. is a great stock for the investor looking for long-term growth. If you look at the track record, we have demonstrated that we can produce consistent results as a company. We said we would do 25% growth in earnings-per-share per year. To date, we’ve actually delivered in excess of 25% per year. Looking to the future, we have long-term recurring revenue, highly diversified across multiple industries with low customer concentration. We’ve seen expansion in our operating margins and increases in our internal growth rates. The second reason is that the demand for our services continues to grow. This accelerating demand for outsourcing, particularly in very large industries with new services, means that the market is large enough for us to continue to sustain this growth for a long time. Third, with the rapid change in the industry and in technology, one of the key capabilities is the ability to innovate rapidly, and to capitalize on new market opportunities. We’ve done that for the last four and a half years. We’ve transformed F.Y.I. into a company that can take advantage of changes in technology and respond to the needs of our customers. This should give a long-term investor the confidence that this management team can continue to create value and can lead whatever change is necessary to continue to navigate in a world dominated by rapid change. We think that is a distinguishing characteristic of F.Y.I. versus others in this market. Finally, F.Y.I.’s leadership consists of a very talented and committed management team. Management owns about 15% of the stock. And for the go-forward management team, there is a significant incentive to make sure that we continue to lead the industry. So I think if you want an investment in this industry, F.Y.I. really is the answer.

TWST: Thank you. (TM)

ED H. BOWMAN 
 President & CEO
 F.Y.I., Incorporated
 3232 McKinney Avenue
 Suite 900
 Dallas, Texas 75204
 (214) 953-7555 
 (214) 953-7556 - FAX
 www.fyii.com
 e-mail: info@fyii.com

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