Business Software Helps Big Companies Run More Efficiently

• Kevin Harlin
• On 6:19 pm EDT, Friday October 23, 2009

SunTrust Banks didn't exactly have a problem. Customers who wanted to open new accounts were walking into branches and doing it.

But the process just wasn't very efficient.

Security and anti-money-laundering checks bogged employees down, slowing what should have been a simple transaction. So in 2007, the Atlanta company brought in Pegasystems (NasdaqGS:PEGA - News) -- and its business process management software -- to streamline things.

The change was dramatic. SunTrust's (NYSE:STI - News) new-account openings increased more than 400%. And it was able to save money by redeploying many back-office employees, according to one analyst's look at the deal.

Hot Industry

Those kinds of results have made software for business process management, BPM for short, a hot commodity, even in a cool economic climate.

"BPM and the ability to automate important parts of the business in record time, and then build for change, really appeals to pragmatic buyers when times are tough," Alan Trefler, Pega's founder and CEO, told IBD.

Cambridge, Mass.-based Pegasystems is one of the top pure plays in the field. The company has posted double-digit sales growth every quarter since the start of 2006. It's reported triple-digit top-line growth over the past three quarters.

Trefler doesn't think BPM sales automatically rise when times are tough. Nor does he think they'll fall off with economic rebounds. But the IT consulting firm Gartner thinks BPM spending has benefited from the weak economy because companies are looking for ways to do more with less.

Worldwide, firms spent more than $1.6 billion on BPM software and support in 2008, up from $1.4 billion the year before, the consulting firm says.

Some tech firms are seeing hints of recovery. Tech outsourcing bellwether Infosys Technologies (NasdaqGS:INFY - News) this month beat estimates, reporting a tough but improving landscape.

Even if that recovery doesn't come soon, many firms are still increasing their BPM spending. More than half of the BPM users surveyed by Gartner this year said they expected to increase spending on the software by at least 5% in the next 12 months.

"We expect this market will remain one of the fastest-growing software areas regardless of the economy," wrote William Blair analyst Laura Lederman, who documented the Suntrust example in a client note.

BPM connects all of a firm's legacy systems and existing middleware programs. Its decision-making software, which looks at a host of data, applies rules that are programmed in to help users make quick decisions.

Farmers Insurance Group, for instance, rolled out the software a few years ago. Once implemented, the time needed to obtain a commercial insurance quote went from 14 days to 14 minutes, according to Lederman.

This market is still fragmented. Software giant IBM (NYSE:IBM - News) was the top vendor in 2008, according to Gartner, with 23.4% of BMP market share. Oracle (NasdaqGS:ORCL - News) was second, with 9.4%. Pegasystems ranked 6th, with 7.2%.

But analysts say Pegasystems, as a pure play, has built a more nimble and easier-to-use software suite. Once installed, analysts say the software is easy to use and easy to adjust. That makes for less time on hold with tech support.

"These guys can get up and running, and implement the product a lot faster than some of the larger players," said Dougherty & Co. analyst Raghavan Sarathy.

Trefler, a one-time chess champion who dabbled with teaching computers to play the game, founded the company in 1983. The name is a play on Pegasus, the winged horse of Greek mythology.

Several Industries

The company has built the framework to serve core verticals such as the financial services industry, health care and insurance. Existing infrastructure is quickly adapted to specific client needs.

"Oracle and Sun (NasdaqGS:JAVA - News)(Microsystems) and IBM, and all of those companies really were there to cater to programers," Trefler said. "We're tying to cater to business people and IT staff, who think their folks have more important things to do than programming."

In the second quarter, the company posted earnings per share of 30 cents, up 275% from a year earlier. Revenue climbed 25% to $63.9 million. The company's after-tax margin was 17.6%, up from 5.6% the year before and 13.9% in the first quarter. In the first six months of the year, software license revenue climbed 61% from a year earlier to $53.7 million.

For all of 2009, analysts expect EPS of 79 cents, up 172% from 2008.

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