1218: Why Pegasystems Is Betting on Work, Not Tokens | Ken Stillwell, CFO, Pegasystems
Ken Stilwell, CFO and COO of Pegasystems, discusses his unconventional career path from public accounting through M&A to becoming a deeply operational CFO who prioritizes business immersion over financial distance. He explains Pega's cloud transition strategy, AI economics, and how Rule 40 fundamentally transformed the company's operations and culture.
Summary
Ken Stilwell's interview covers his progression from Price Waterhouse M&A work in the early 1990s to becoming CFO of multiple companies, including Dynatrace and Pega Systems (since 2016). He emphasizes that his transformation from a quantitative, numbers-driven executive to an operationally engaged business leader happened gradually as he worked with various CEOs and business leaders who showed him that understanding actual business dynamics—customer needs, competitive threats, employee motivation—was essential to interpreting financial data correctly.
Stilwell describes his early experience as a business unit CFO in manufacturing, where he was expected to walk floors, understand products, and grasp margin drivers at a granular level. This experience shaped his belief that effective CFOs must be embedded in operations rather than distant financial arbiters. He emphasizes the distinction between holding people accountable from a distance versus building trust and understanding to help solve problems collaboratively. This approach led to business leaders inviting him into strategic meetings, customer visits, and operational discussions organically.
Regarding Pegasystems, Stilwell explains that the company provides workflow automation and process management platforms for enterprises. Pega helps large organizations execute deterministic business processes—loan originations, customer service tickets, onboarding—at scale with consistency and predictability. The company has evolved to include AI and robotic process automation capabilities.
Stilwell details the company's major cloud transition investments over the past seven years. Three critical elements were: (1) offering 'cloud choice'—allowing clients to use either Pega Cloud or manage their own cloud deployments to meet them where they were; (2) hiring world-class cloud expertise in engineering, architecture, and operations; and (3) aligning incentives across the sales force and clients toward cloud adoption. He notes that Pega's cloud gross margin started below 30% and required investment step-functions to reach the current ~80% level, even requiring a temporary margin decline during a scaling transition.
On Pega's revenue model, Stilwell explains the company drives growth primarily through expansion of existing customer relationships rather than new customer acquisition. Early customer wins are often smaller, but as clients experience value, they deepen commitment and expand usage. Cloud ACV growth and maintaining reasonable margins (targeting 80%+) are key metrics, though Pega intentionally avoids maximizing margin if it would constrain growth investments.
A significant decision Stilwell highlights is Pega's choice not to charge customers per AI token used. The company recognized that token-based pricing would create perverse incentives—leading to inefficient model selection and 'token maximization' rather than genuine value creation. Instead, Pega keeps pricing work-based and helps clients use the right AI model for the right task, avoiding wasteful AI applications. Stilwell notes the industry has since moved toward similar approaches, validating this early decision.
On AI ROI broadly, Stilwell observes that most organizations haven't achieved measurable ROI from AI because they're experimenting with the wrong use cases—applying AI where it's overkill and inefficient. Real value emerges when AI is applied to specific business activities where it enables speed and scale that humans cannot match, particularly in judgment and data analysis. However, he acknowledges uncertainty about how AI will reshape cost structures and workforce requirements.
Stilwell emphasizes Rule 40 as the most impactful principle he's brought to Pega. This metric—combining revenue/ARR growth with margin—incentivizes teams to think about trade-offs and ensure growth remains economically sound. The concept has deeply penetrated Pega's culture, with 95%+ of employees understanding it and operating with a Rule 40 mindset. The results are striking: when Stilwell joined Pega, the company was at $500M revenue with <$50M free cash flow; it now approaches $2B revenue with ~$500M free cash flow.
On visibility into the business, Stilwell prioritizes customer adoption metrics—how quickly clients go live with new applications and scale transaction volume—over accounting results. He also emphasizes pattern recognition across verticals, customer segments, regions, and use cases, noting that regional trends often foreshadow broader shifts.
For software economics, Stilwell believes customers should expect to pay based on work performed (outcomes like closed loans or resolved tickets) rather than pure capacity. This ties pricing to actual business value creation.
In the mentoring section, Stilwell articulates three principles for executive success: (1) lean in and immerse yourself in the business rather than remaining a passenger; (2) maintain humility despite success, appreciating that different situations require different solutions and acknowledging what you don't know; (3) genuinely care for your team, clients, and peers, recognizing they're navigating personal and professional challenges. He notes that early career successes can create false confidence that 'the playbook' works everywhere, which his private equity turnaround experience dispelled.
Personally, Stilwell acknowledges spending minimal time on himself and instead prioritizes his family. He invests heavily in his children's activities—attending events across distances, coaching sports, visiting college—and finds meaning in witnessing the growth of people around him. He notes that this presence when possible makes family members more accepting of business travel demands.
For his forward outlook, Stilwell emphasizes navigating uncertainty over the next 12 months amid AI disruption, mid-cycle elections, and global instability. His priority is maintaining organizational agility, managing change well, and being a calm, process-focused leader who helps the team understand the journey ahead without getting caught in emotional reactions to economic cycles.
About this episode
<p>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.</p><p>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%.</p><p>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</p><p>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.</p><p>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.</p><p>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.</p><h2></h2><p></p>
Key Insights
- Stilwell transitioned from a quantitative, transaction-focused CFO brand to an operationally embedded business leader by recognizing that financial numbers are historical or speculative—understanding actual business dynamics requires physical presence in operations, customer interactions, and competitive environments.
- Pega's cloud transition required accepting substandard (under 30%) gross margins initially and deliberately investing through margin-reducing step-functions to build world-class cloud operations, demonstrating that long-term margin expansion required accepting short-term margin pressure.
- The company rejected token-based AI pricing despite market adoption of the model because such pricing would incentivize inefficient AI usage and 'token maximization' rather than directing customers toward economically sound AI applications, and the market subsequently validated this approach.
- Rule 40 adoption at Pega fundamentally changed how employees operated across the organization—95%+ of staff understand and apply the principle—creating a cultural shift toward evaluating whether growth investments are economically justified rather than pursuing growth and margin independently.
- Customer adoption velocity (how quickly clients go live with applications and scale transaction volume) serves as a leading indicator of business health that precedes financial results and is more predictive than trailing revenue metrics.
- Stilwell's early career successes in M&A and two successful business exits created overconfidence that executing 'the playbook' would produce success in all situations, which his private equity turnaround experience corrected by revealing that business failures often stem from market position loss, disruption, poor leadership, or insufficient funding rather than execution gaps.
- Real AI value emerges not from widespread experimentation but from specific, narrowly-targeted applications where AI enables speed and scale that humans cannot achieve, yet most organizational AI spending remains in exploratory phases rather than mature value-generating deployments.
- Stilwell's approach to building trust with business leaders (sales, product, operations) involved sharing financial information generously and offering coaching on business thinking, which transformed his relationship dynamic from adversarial accountability to collaborative partnership where leaders actively sought his input.
Topics
Transcript
Support for CFO Thought Leader comes from Salesforce. Unify selling and billing for a seamless customer experience. And OneStream. Trusted data. Faster decisions. Hello, this is Brittany Serwin, CFO of the Middleby Corporation, and you are listening to the CFO Thought Leader podcast. This is episode 1218. So what if you actually really engage and try to understand where's the product gaps? Where's the competitive threats? Like that then kind of almost builds this really tight bond where the sales leader looks at the CFO and says, you're on my team. You know, you're not like someone that's like holding me accountable all the time. You will hold me accountable, but you're also someone that's going to help pitch in.…
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