In 2023, United Effects began researching a problem space that has led us to speak to CEOs, investors, consultants, and board members across many industries. We found a destructive pattern to which market leading SaaS (Software as a service) companies that have endured for a decade or more in the sub $250m ARR growth stage can quickly fall victim. The root cause of this pattern is legacy technology and debt; however, it can take years before this destabilizing cause of revenue loss is understood to be technological. In speaking to these executives and gathering data from our own experiences, we’ve identified some of the indicators that predict the issue, and we’ve coined a term for this cliff that races toward such companies. We call it the Hidden Chasm (inspired by everyone’s favorite business chasm discussed by Geoffrey Moore).
The first sign is usually declining retention. Established enterprises begin to see a drop-off in clients even if sales aren’t immediately impacted, though new sales will suffer quickly thereafter. Newer clients that have less to lose start leaving and soon older clients that represent significant recurring revenue begin to follow. This is often the first red flag indicating deeper underlying issues. A company facing this issue may respond with churn in their sales organization.
The retention struggle is usually amplified by heavy disruption from competitors. This pressure of keeping up with competitors quickly affects new sales, making NRR (net revenue retention) even more important. We now have a negative feedback loop between declining retention and declining new sales. These newer entrants in the market, or existing competitors, offer similar or greater value propositions with better experiences, at lower prices. A common reaction to this threat is to reconsider UX, pricing strategies, and value offerings to remain relevant.
In response to these challenges, the product and engineering teams are often put on notice to deliver more competitive features, better user experiences, analytics, and insights. There's a concerted effort to innovate and push the product beyond its current capabilities to meet market demands and counteract the competition. During this time, the company may see a lot of vision casting internally, describing a bold new direction. The company may also see more instances of urgent one-offs to satisfy the needs of upset clients or gain new revenue. However, this is where the cracks begin to show more prominently.
Despite the best efforts of the product and engineering teams, progress stalls. The attempt to rapidly innovate and overhaul the product is met with significant resistance due to existing technical infrastructure. The one-off projects themselves exacerbate the problem by consuming resources and budget while not contributing toward a sustainable solution to the broader issues destabilizing revenue. Additionally, quality and security are the first sacrifices made in the name of speed, contributing to serious compliance and user security threats that hide in their products. In the United States, the average cost of a security breach is $9.4m. These realities result in expanding timelines and estimates. Projects that should take weeks or months stretch into years, and the pace of development slows to a crawl. The company is left highly vulnerable and unable to respond to market changes with agility.
Ultimately, the root cause of the slowdown and inability to innovate at a necessary pace is shown to be legacy technology and associated technical debt. Over the years, shortcuts and compromises accumulate, leading to a complex, intertwined system with glaring security issues, that is difficult to update or replace. This technical debt acts as a significant barrier to progress, valuation, and brand confidence, preventing the company from pivoting or adapting quickly enough to survive the competitive onslaught.
This shouldn’t be a surprise. Tech debt is itself one of the biggest threats to productivity, revenue, and security in the world. In a recent WSJ article by Christopher Mims, tech debt was called out as an invisible $1.52 trillion problem plaguing the technology industry.
For these companies, as the realization sets in that they’ve hit a physical limit in terms of how quickly they can advance their company and realign costs, the Hidden Chasm that was once a distant threat now looms large and unavoidable.
The journey toward this chasm is marked by a series of warning signs culminating in the stark reality of technological obsolescence. It complicates and interferes with every possible business strategy to de-risk and alleviate the market pressure, such as refactoring technology, M&A (Mergers & Acquisitions), or VC/PE fundraising to name a few.
If you’re reading this and it sounds all too familiar, don’t panic. United Effects is actively working with companies to address the Hidden Chasm and as we build solutions and gather perspectives on this problem, we are excited to share them with you.
In the meantime, if you’re reading this and seeing your own journey reflected in the warning signs, please reach out. We’d love to hear from you and maybe we can help.
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