The Wizardry of Business Process Management: Part 5

Part 1 of this blog series started a lengthy discussion about the value proposition and parts-and-parcels of business process management (BPM), with an ensuing focus on Pegasystems (also known as Pega) as one of the leading BPM suite providers. Part 2Part 3, and Part 4 then analyzed in depth a number of the vendor’s “BPM secret sauce” ingredients.

Pega is one of the leading vendors in the overall BPM software market (it has been automating business processes for more than 25 years), and it has a strong presence in the financial services, insurance, and health care markets. The vendor has been most successful competing for customers whose businesses are characterized by a high degree of change, complexity, and size.

The principal competitive factors within Pega’s market include the following:

  • the BPM product’s adaptabilityscalability, functionality, and performance;

  • proven success in delivering cost savings and efficiency improvements;

  • ease-of-use for developers, business units, and end users;

  • establishment of a significant base of reference customers; and

  • the ability to integrate with other products and technologies.

Taking the Customers’ Word For IT

The steady improvements in customer service and business agility should naturally lead to happier customers, more efficient operations, and higher profit margins. Pega’s BPM and customer relationship management (CRM) customers gladly talk about their typical results as follows:

  • Revenue growth – an average 25 percent increase in cross-selling and up-selling; customer acquisition up 15 to 30 percent; a 50 percent decrease in application abandonment; and time-to-market (TTM) cut by 18 percent;

  • Service excellence – on average US$8 million in lost profit margins recovered; a five point customer retention increase; a 30 percent increase in one-touch problem resolution; and a 20 percent increase in customer satisfaction scores;

  • Operational effectiveness – a 40 percent increase in productivity; a 60 percent increase in straight-through processing (STP); a 70 percent decrease in time-to-resolution; and new-hire training cut by 60 percent.

“MIA” on the Supply Side

Pega’s product development priority is to continue expanding the capabilities of its rules-based SmartBPM Suite. The vendor intends to maintain and extend the support of its existing industry solution frameworks, and may choose to invest in additional frameworks which incorporate the latest business innovations. One major area Pega has not focused much on thus far is the “upstream” supply chain interactions with suppliers and in manufacturing.

In fact, not many commercial BPM products provide real-time insight into the manufacturing process operation. Yet the process flow modeling capability of BPM suites could allow management to not only easily identify bottlenecks and inefficiencies in the process, but also to more easily modify the process to improve productivity.

For instance, with an industrial BPM suite, companies could digitize their work processes and close the loop on performance with actual execution data. By applying BPM in manufacturing plants, companies could manage and audit their production more effectively and consistently, thus improving their conformance, compliance, throughput, and ability to deliver.

Enterprises could also empower their workforce by integrating people and their roles, and by customizing individuals’ work styles and decision-making. Astute BPM suites that focus on manufacturing could enable companies to close the loop on production process improvement, digitize good manufacturing practice (GMP) tasks, standard operating procedures (SOPs) and work instructions, take corrective action/exception management, perform Hazard Analysis and Critical Control Point (HACCP) monitoring procedures, orchestrate high-level processes, and manage data between various disparate systems. Domain experts could be empowered to solve production problems immediately on the shop floor.

The (Missing) Supply Chain Opportunity

The business challenge, which can thus be turned into opportunity, comes from the fact that selling and fulfillment across an extended supply chain have become quite complex. Namely, the words “multiple” and “cross-channel” have become part of the complicated game, starting with multiple enterprises involved in trade, whereby each enterprise will often have multiple locations with multiple brands, divisions, and independent business units (IBUs), each with its own back-end systems, sales channels, etc.

Consequently, multiple catalogs with products or services and multiple product choices that require configuration and guided selling have long become a matter of course. Furthermore, globalization and more demanding customer expectations have resulted in the need for multiple fulfillment methods, whereby goods can be delivered from warehouses, stores, or directly from suppliers (via drop shipping), through third-party logistics (3PL) networks or the company’s own fleet, through a third-party service network, etc.

As seen in TEC’s previous article Retailing Trends—Shopping Anyway and Everywhere, Internet-based technological advancements have caused consumers to expect interchangeable multichannel (e.g., retail store, catalog, call center, commercial contractor, Web site, kiosk) inquiry, shopping, and goods return. In fact nowadays, a consumer expects a true cross-channel experience, and rightfully so, where they are able to buy something online and return it to the closest retail store for a refund, without any questions asked.

Failing to execute well in such intricate environments typically results in lower revenue growth, declining profit margins, and declining brand equity, with the all-too-common symptoms of high operating costs, inaccurate orders, and poor on-time delivery. It can also result in high stock-outs (missed sales opportunities), lower customer satisfaction, or a myriad of other problems.

Should Pega try to tackle these manufacturing and distribution markets, it would face fierce competition from Sterling Commerce, Manhattan Associates, or i2 Technologies. These vendors have recently delivered supply chain process platforms (SCPPs) that are based on BPM concepts and tools (e.g., rules engines and best practices frameworks).

Pega's R&D Feat Continues

During 2008, Pega’s R&D expenses were approximately US$31.5 million, which is more than some competitors’ revenues, and with increased spending in R&D reported through the first half of 2009, time will only tell whether Pega will have the wherewithal to tackle other industries beyond its current service strongholds. At the end of 2008, Pega’s development group consisted of 162 people and has been supplemented by the use of contracted resources. Yet, bigger competitors are becoming even bigger, as witnessed in the recent merger of Software AG and IDS Scheer, the latter party having significant footholds amid SAP and Oracle customers.

In the short-to-mid-term, it appears that Pega’s focus is to maintain and extend the support of popular hardware platforms, operating systems, databases, and connectivity options to facilitate easy and rapid deployment in diverse IT environments. The focus of the most recent SmartBPM 5.5 product release is on showing the next generation of an integrated composition environment (ICE), with the intent to obtain faster business stakeholder buy-in and to fit more easily into existing environments, thanks to its Internet application composing capabilities.

The Federated Business Frameworks for the SmartBPM 5.5 release is comprised of four components that enable system administrators to create business processes and workflows that incorporate processes running across different operational units and departments. The tools, unveiled in late 2008, also offer a central management view of the touch points of connected applications and a unified work portal that employees can use to access newly defined processes.

The new components include the Integrated Work Manager (IWM) that a system administrator can use to view and connect SmartBPM applications across an organization and build a unifying portal. The Business Information Exchange (BIX) pulls information from multiple BPM applications and makes it available in an extensible markup language (XML) format or as database tables or delimited files for use in business intelligence (BI) systems and integrated process reporting purposes.

The remaining two new tools include the Virtual Enterprise Repository (VER) and the Autonomic Event Services (EAS) that were briefly mentioned in Part 4. The VER repository offers a library of ready to use Web services set up by system administrators. Process analysts or line of business (LOB) managers can browse the repository and incorporate services into a workflow diagram. The model can then be deployed on the SmartBPM engine.

For its part, the AES monitors the health of the total BPM system by tracking the performance of the application touch points. The software can spot and diagnose problems and send alerts to system administrators when performance falls below a preset threshold.

Also in late 2008, Pegasystems introduced what it called a cloud computing-based platform as a service (PaaS) software layer on top of the SmartBPM engine that makes it possible to replicate a process instance and deploy it to a separate business unit. This add-on layer to PegaRULES Process Commander (PRPC), which is the core of Pega’s SmartBPM suite, makes it possible to define and host multitenant instances on a single server for lines of business, departments, merged companies, or other internal clients.

Each replicated instance includes the same single sign-on (SSO), database schema, integration component, and any other object of the original. The idea behind the add-on layer is to make it possible to re-deploy processes without having to install a separate BPM engine.

So, What Else Should Pega Improve?

In May 2009, Pega announced a public cloud computing offering with Amazon Web Services and Capgemini, which addresses competitive offerings from Lombardi Software, Appian Anywhere, Collosa ProcessMaker, or Cordys Process Factory, to name but a few. Pega has also made its Application Profiler available to its customers and prospects as a free hosted service, with output as Microsoft Word documents and PRPC import rule sets.  This profiler offers a wizard that allows business process owners and business analysts to directly capture requirements and objectives into a Pega SmartBPM solution.

Many competitors may point to Pega’s traditional lack of focus on small and midsize enterprises (SMEs), which is a market segment that will become the main BPM battleground sooner or later. I have seen that trend in many other enterprise applications markets, especially in enterprise resource planning (ERP), and there is no reason that BPM should not follow suit. While Pega has not traditionally focused on the SMB market space, many of its customer implementations have focused on divisional or business unit projects to automate and assist groups of 50 users or fewer.

Pega has historically derived a significant portion of its revenue from the “who's who” customers in the financial services, insurance, and health care markets, and sales to these markets are important for the vendor’s future growth. However, competitive pressures, industry consolidation, decreasing operating margins, regulatory changes, and privacy concerns affect the financial condition of Pega customers and their willingness to buy more software. In addition, customers’ purchasing patterns for large technology projects are somewhat discretionary in these industries.

The financial services and insurance markets are undergoing intense domestic and international consolidation and financial turmoil, while consolidation has been increasing in the health care market. Consolidation and market turmoil may interrupt normal buying behavior and increase the volatility of Pega’s operating results.

In recent years, several of the vendor’s customers have been merged or consolidated, and we should only expect this to continue in the near future. Future mergers or consolidations may cause a decline in Pega’s revenues and adversely affect its future financial performance. Thus, there is some writing on the wall for Pega to look for customers in other industries, and to appeal to smaller customers across the board.

Based on the earnings results that Pega has reported over the past couple of years, the company has been able to buck the trend and grow both overall revenues and license revenues. In August 2009, the company had to increase its guidance as the company believes that both its market presence and success will continue both in its traditional core market verticals, as well as in many others where the company plays, such as government, communications, travel and hospitality, retail, and manufacturing.

This appeal to smaller enterprises might not be an easy feat in light of a raft of well-established competitors in that segment. In addition to the abovementioned SaaS BPM offerings, Global 360 recently delivered BPM capabilities that are designed for each of the three specific personas that are critical to the success of the BPM initiative. These are as follows: the Builder – the developer of the system; the End-User – business individuals using the application; and the Manager – the overseer of the system and the operation.

Persona-based BPM leverages role-based research to deliver the tools, tasks, and views to optimize the functionality of the BPM system for each persona. This tailored approach should improve the productivity of each user as they interact with the system based on their “view point,” leveraging just the capabilities they need to do their job. As a result, individual productivity can be improved and BPM projects experience faster time-to-results.

In addition, smaller enterprises might not necessarily need and appreciate Pega’s incremental, one-business-process-at-a-time approach for large service corporations. In talking to some Pega staffers, they did not appreciate my analogy of Pega as being an “SAP of the BPM market.” Well, they did like the similarity in terms of market leadership, an impressive install base, and all-encompassing suite, but the downside is the association with SAP’s (perceived) complexity.

Pega may be at a disadvantage with respect to its larger competitors, many of which have greater sales, marketing, and financial resources, more extensive geographical presence, and greater name recognition than Pega does. In addition, Pega may be at a disadvantage with respect to its ability to provide expertise outside its somewhat narrow set of target industries.

What About Geographic Expansion?

In 2008, sales to customers based outside the domestic US market represented 38 percent of Pega’s total revenue, which also begs for some improvement. Pega has its wholly owned subsidiaries based in the UK, Germany, the Netherlands, Switzerland, Canada, India, and Australia. These offices market Pega products and render consulting and training services to customers based in North America, Europe, Mexico, India, Australia, Hong Kong, and Singapore.

Apparently, coveted growth will necessitate expanded international operations in Latin America and the Asia-Pacific region, requiring additional managerial attention and increased costs. To that end, Pega might have to hire personnel to accommodate international growth, and may also enter into agreements with local distributors, representatives, or resellers. But we all know that new market penetration requires near-perfect execution and lots of time and resources to build reputation and a reference customer base.

At the end of the day, dear readers, your comments, thoughts, suggestions, or individual experiences with Pega and other BPM tools are more than welcome. What do you think about Pega’s BPM approaches and how it compares to other competitive solutions? How do you handle your processes? Manually? In an automated way? Or somewhere between (where only some processes are automated)?
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