Salesforce.com announced last Friday that it will be the main tenant in a 61-story building under construction in San Francisco. When its 4,000 Bay-area employees move in, company veteran Rafe Brown will not be among them.
Brown spent nine years at the juggernaut cloud software company before leaving his post as senior vice president of finance last September. During that time, salesforce.com’s revenue ballooned from a $170 million run rate to surpass the $4 billion mark. There seems little doubt that the growth train will continue to roll. So why did Brown opt for a new employer one-eighth that size?
For starters, Brown is now a CFO for the first time. The employer, Pegasystems, is a $500 million, publicly held provider of business-process-management and (like salesforce) customer-relationship-management software. Founded 30 years ago, it’s not among Silicon Valley’s legions of early-stage growth companies. It’s growing, though at nothing like the maglev pace set by salesforce. During the two years ended December 31, 2013, “Pega,” as the company is often referred to after its stock symbol, grew about 22 percent. That compared with 83 percent for the younger, larger salesforce in its two most recent fiscal years, which ended Jan. 31.
Brown insists the market opportunity ahead of Pega is huge. “We just crossed the half-billion mark, and there’s a lot going on at the company as we’ve got our eyes firmly set on being a billion-dollar company [and then] a multibillion-dollar one,” he says.
He notes that Pega is something of a natural fit for him, given its host of similarities to salesforce. “Both are in enterprise software, and both are very much driven by product development, how they serve their customers and how they distribute their products,” Brown says. “Those are the big investment choices that are first and foremost in every budgeting cycle, in determining what metrics the company should focus on, and in deciding where to invest time and funding.”
He particularly likes the customer focus. In Pega’s recent history, he points out, more than 70 percent of the company’s bookings have come from existing customers. Given the cost-of-sales advantages of retaining clients vs. winning new ones, that’s part of the reason Pega’s profitability is growing much faster than its revenue: Both net income and earnings per share approximately quadrupled in the past two years.
Also boosting the bottom line is the company’s success in its stated goal to decrease the percentage of its revenue from system implementation and integration projects. A 38 percent chunk of Pega’s business in 2011, it was down to 31 percent last year. The company has been building an “ecosystem” of partners to which it can offload such projects. “From a business perspective that’s very healthy, because [software] licensing and maintenance have much higher gross margin,” Brown notes.
Another 2013 profit enhancer: The company finished the year behind some of its hiring goals, the CFO adds. (Salesforce.com, meanwhile, continues to operate at a loss despite its topline surge, running up a $232 million net deficit last year.)
A Culture of Change
Given that Pega is planning and expecting to pick up its sales growth pace, Brown feels fortunate to have had his experience at salesforce. “When you’re in a period of rapid growth, you outgrow systems and processes that were put in place for a smaller company,” he says. For example, during his time at salesforce both the quote-to-cash cycle and the ERP system that had been implemented before the company’s 2004 IPO required major upgrades as the company scaled.
The same issues are in play for Pega today. The company is using the same technology it sells to customers to enhance its existing ERP system and quote-to-cash cycle. “We’re now looking at the changes that need to take place in the organization to accommodate growth and ensure that we’re solving not just the problems in front of us today as a $500 million company,” Brown says, “but also the ones we need to solve to be a billion-dollar company in the next few years.”
Also getting upgrades are procurement and travel-and-entertainment systems and processes. In procurement, Pega is looking at new approval limits and streamlining the approval process for greater efficiency. It’s also using its technology to gather information designed to ensure control of requisitions and enable the finance and accounting team to better monitor accruals and planned spend.
Part of the challenge is thinking about the planning horizon. As an organization grows, it takes longer to implement such changes, even projects aimed at what should be relatively simple things like getting bills out the door and collecting cash. “At a small organization, everybody sits close to each other and can more easily work out those issues,” Brown says. “When you’re bigger everything is spread out more, and there’s more volume, so you really have to develop an expertise around not just problem-solving but also building processes and finding efficiencies.”
Another focus for Brown is getting everyone to realize that innovation is part of their job. “People in finance organizations, especially, don’t necessarily think of innovation as being in their job description,” he says. “But it truly is.”
At salesforce, for example, the revenue operation team drove a lot of innovation. For example, it automated order-entry tools that drove product-configuration and pricing decisions. At Pega, the IT team recently released an application built on the company’s software platform that streamlines employee status changes — everything from promotions to departmental transfers. Within finance, the team is engaged in streamlining how its members work together as deals are booked, billed and analyzed for revenue recognition.
“Having come in as CFO a few months ago, there’s no way I have the visibility into the organization’s myriad functions to see right off the bat what changes we could make,” Brown says. “It’s about empowering everyone on the team to look for ways to help us grow and become a smarter organization, and to do better work that they’re probably going to enjoy much more.”