When Pegasystems began building its cloud business, the economics were hardly what investors would expect from a mature software company. Cloud gross margin was below 30%, recalls CFO and COO Ken Stillwell. The destination was roughly 80%. Getting there, however, required accepting that the path would not be straight.
At one point, Pega deliberately stepped backward on margin to make investments needed to scale the operation. “It put us probably off our margin targets by a year or two,” Stillwell says. “But it was a necessary investment for us to continue to scale.” Today, he says, cloud gross margin is approximately 80%.
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That willingness to examine economics without losing sight of the customer runs through Stillwell’s thinking about Pega today. Growth comes largely from expanding existing customer relationships, making adoption—and the transaction volumes that follow—an important early signal. Stillwell looks for patterns across verticals, regions and customer cohorts to understand where expansion is taking hold. 1218 Ken Stillwell
AI introduces another economic puzzle. Pega chose not to build its model around maximizing token consumption. Stillwell argues that customers should use AI where it actually fits the work, selecting the appropriate model—or no AI at all—rather than treating consumption as the objective.
It is an approach consistent with the Rule of 40 discipline Stillwell helped spread throughout Pega: growth matters, but so do the economics behind it.
For the coming year, his priority is less about predicting every turn than preparing Pega to absorb them: staying agile, managing change and, as Stillwell puts it, remaining “calm and process focused” when the seas get rough.
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CFOTL: Right now we’d like to find out about Pega Systems. What does this company provide? Who relies on it? And where’s the opportunity today?
Stillwell: Pega has a workflow platform. Large businesses in industries where there needs to be a deterministic process for how work is done have engaged with us very deeply on helping them leverage our platform to anchor these enterprise processes. We’ve added AI, robotic process automation and integrations to access data and use Pega as an orchestration engine. Pega is helping clients execute significant-scale transactions in an automated, repeatable way so that you get scale and predictability and reduce the amount of time it takes to run your business.
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CFOTL: Help us understand Pega’s economics here. Is the most important story about cloud ACV, customer expansion, or something else?
Stillwell: The way Pega generates value is we expand the relationships we have with our existing clients, and then selectively target new clients where we feel they can start that journey to have a significant expansion opportunity. Most of our growth has come from the expansion of our existing clients. As we expand, naturally Pega Cloud ACV is a really important expansion metric.
CFOTL: Pega chose not to charge clients per AI token. How did you reach that decision?
Stillwell: We focused on: If we can allow clients to use AI, we’ll help them use the right model at the right time. Don’t use AI when AI is not the most efficient. We felt we could control those costs for our clients by not charging them based on tokens and put the motivation of both the client and Pega to use AI for the right things at the right time and use the right model.
CFOTL: Where are customers producing measurable value today?
Stillwell: I think ROI has been elusive around AI. Where you really see value is when you think about how you use AI in a specific activity in your business and allow AI to do things that humans maybe couldn’t do at the speed and scale that you could with AI. There’s certainly value with AI. I just think a lot of the spend right now is more trial and error.