With ethical issues surrounding Pega, do you still want them in your ecosystem?

The Situation: A US jury has ordered Pegasystems to pay low-code workflow rivals Appian $2.036 billion. Customers can park concerns that this means the end of Pegasystems any time soon. Neither will it result in a rapid influx of funds to accelerate Appian’s roadmap. But it does raise ethical questions customers will want to consider as they broaden their partner ecosystems and select their partners in the post-pandemic economy.

Headline grabbing award is just the start of what could be a long-drawn process

Pega has been ordered to pay damages for misappropriating Appian trade secrets, by employing a contractor to act as a spy, and by other employees using bogus credentials to gain access to software trials.

Legal disputes between commercial rivals rarely end fast, or with a knock-out blow. It’s worth recalling precedents such as the wrangle between Oracle and SAP regarding the latter’s subsidiary TomorrowNow and alleged intellectual property infringements. For four years after the initial $1.3 billion ruling in favor of Oracle, the dispute dragged on. Yes, it distracted management and provided bad PR, but in the end, the eye-watering initial damages were slashed down to $359 million.

As markets mature, legal proceedings can become strategic levers to distract competitors. It took seven years for Amazon and Samsung to end their smartphone patent dispute, and even then, the terms were never disclosed.

Of course, we should take notice of the first verdict in the case of Appian vs. Pega, it is certainly attention grabbing – but we can also be sure that there are many appeals to be exhausted among legal twists and turns before the fat lady sings on this one.

Planned and current work is likely to carry on as if nothing has happened, at least in the near term.

Pega sends a positive message with Everflow acquisition

Pega had been doing well this year. First-quarter revenue was up 20% to $376 million, and gross margin improved to 77%.  While Pega does not have to hand over a cent unless and until all the appeal options open to them are exhausted, the reality is that the share price has taken a hammering – down from over $70 a share pre the May 10 verdict, to $50 and below in the days since. If sustained there will be consequences. Investors will demand that belts are tightened, and that can mean job cuts – reducing capacity, and putting the brake on spend from marketing to R&D. In addition, Pega’s market cap has fallen below $4bn, making it an increasingly affordable acquisition target for an ambitious competitor, such as Microsoft, IBM Software or ServiceNow.

That share price can of course bounce back – and on first quarter performance alone, that would look possible. But for that to happen relies on customer confidence. And partners tell us the case has already impacted confidence—with ethics, governance, and compliance at the top of their customer concerns. One leader at a specialist Pega shop said the news left their own plans to sell very much up in the air.

Pega’s acquisition of process mining start-up Everflow on May 24 indicates Pega is keen to send the message to the market that it is going to carry on investing and growing. Though, as acquisitions go, this is a small one.

Concerns over ethics could have significant implications

Today, ethics – and those of your partners and suppliers – are high on the corporate agenda. Many enterprise contracts set out expectations that suppliers behave ethically and treat the end users of their services, employees and subcontractors fairly.

It is against this context that the impact of the Pega-Appian court case must also be considered as discerning customer become increasingly sensitive about firms in their ecosystem accessing their intimate data.

Appian presented evidence that Pega had set out to learn Appian secrets as a shortcut to out-competing Appian. In a program labeled internally “Project Crush,” it hired an employee from a US government contractor to act as a spy between 2012 and 2014. The link to the company’s tagline, “the software company that crushes complexity,” will not be lost on those familiar with Pega. Appian filed the lawsuit on May 29, 2020.

The contractor made dozens of video recordings of the Appian development environment, which Appian says Pega used to compile its competitive materials and understand where Appian was improving its platform. Pega used the advantages it gained to train sales staff.

Appian claims Pega changed its roadmap in response to the materials the spy provided. The court heard undisputed evidence that Pega employees also used false identities to access Appian software trials.

No sign yet that there is an existential threat to Pega

Whatever the final outcome the court case has made life difficult for Pega until it is resolved. Every RFP and RFI Pega is responding to now or pursues in the near future, has become appreciably tougher to win.

The court-ordered payment to Appian was roughly half the value of Pega. Whether that is an existential threat to Pega remains to be seen. Shares were down in the automation sector, in any event; Appian was in decline over the last six months before the spike driven by the court’s verdict.

The impact on Pega’s share price so far has not yet proven sufficient to trigger acquisition interest from whichever services integrator partner, VC or ISV is keenest to capture the Pega tech, accounts, and people.

The Bottom Line: Customers and partners need more than denials from Pega

Pega says: “We strongly disagree with the claims and the verdict, which are not supported by the facts of the case or the law and are the result of significant error. We have strong grounds to overturn this result, and we are actively pursuing all legal options. As a reminder, the appeals process could potentially take years to complete, and no judgment would be payable until this process has ended.”

For client confidence, Pega must do more than deny everything. It must move fast to convince customers and partners that it has procedures in place to prevent anything remotely like the events described by the court case. If it can do that the share price will bounce, growth plans can remain on track, and customers can maintain faith in the Pega roadmap.