The Hidden Chasm

What is the Hidden Chasm?

The biggest challenges for high growth, M&A-focused SaaS enterprises have a pattern. Can you find your level?
Not every company hits every level in the same order.

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LEVEL 1

The Early Years

You respond to every customer request in your product, sometimes spinning up siloed one-off products to serve their needs. You bend the company’s strategy to the needs of your new and growing customer base. This is all normal and good.

There is a lot of unplanned and organic technical evolution.
You've gone through the major R&D investment to build and deliver V1 of your solution and you are now coasting along with this gaining traction and making ad-hoc updates as customers ask for them.
This may go on for years.

You're gaining traction and market share.

Technical architecture of your solution may not be designed with economic scalability in mind – and at this stage, that’s ok.

Level 2

The Good Years

You’ve helped define a market, revenue is coming in, and the macro indicators (NRR, NNR, EBITDA, etc.) all look good. It seems like you can do no wrong in terms of strategy.

Your product has evolved and you've expanded into more than one offering. Structure, process, domain knowledge, and technology has become siloed within these products.

Inefficiencies and problems are resolved with a hero-culture approach. But thats ok... its working and you're still growing!

Regardless of the lack of clear strategy or proportional tech investment, year-over-year growth continues.

Product enhancements continue and technical evolutions occurs as needed to achieve them.

There may not be a clear 3-to-5-year growth strategy defined.

As the company grows, investment in the technical roadmap and overall engineering is not growing proportionally with that growth.

Speed to market is a growing concern; however, the continued growth compels leadership to not “rock the boat” by addressing tech debt or one-off solutions.

Level 3

Silently Enter the Chasm

New competitors with more modern adaptable technology enter the market. We cross over into the chasm silently and the results begin to show over time.

You've been the definition of a successful company and it has been many years since your founding.

You may start seeing new competitor advertising and unfavorable SEO rankings.

There is not an immediate impact to your business and it appears as though growth will continue. By all accounts, you've built a successful business that has persisted for almost a decade if not more.

Your technology is aging and tech debt growing. Your lack of strategy and organizational maturity is masking the effects for now.

Level 4

Cracks are showing

Growth is still good, but parts of the organization are starting to feel misaligned.

TAM/SAM/SOM is achievable within the individual product lines, but research is showing that more should be possible through the integration of solutions and monetized data.

Net Recurring Revenue (NRR) and Net New Revenue (NNR) start slipping.

Buy vs Build conversations usually start around this timeframe as a means to grab market share despite not having an integration strategy for the siloed product lines.

There may be a push toward Digital or Agile Transformation as a silver bullet.

Most initiatives up to this point have been focused on short-term gains and long-term company goals are abstract and ill-defined with no strategic plans to achieve them - and that has worked to continuously grow revenue.

We will often start to see employee engagement activities at this point, designed to help smooth cooperation, alleviate stress, and align people’s interests. This helps but does not address root causes.

The sales organization is financially incentivized through compensation and performance to push for new features as quickly as possible in the short term, no matter what the long-term cost.

They partner with product to push engineering to deliver “good enough” work that they can sell. We end up with an incorrect definition of “MVP” resulting in negative market repercussions.

The engineering organization may start complaining about the possibility of a technical catastrophe that seems abstract and far away from a leadership perspective.

They complain of being overworked and concerned about “scale”. Issues with quality, performance, and site reliability begin to show. You may hear the term “tech debt” being thrown around.

Level 5

Accelerating into the Chasm

All indicators point to a serious problem in the business but you haven’t yet pinpointed the root cause.

If you’re multi-product, Apps per customer flatten or trend down.

Professional services expenses and revenue are trending up.

COGS are trending up.

Employee retention is trending down.

There is a realization that new features have not been released in a long time.

Engineering estimates are becoming very large and unmanageable.

Realization

The company begins to look at competitors to understand where they stand and why revenue is down. They see a combination of growing pressure, better experiences, and lower pricing per customer.

NRR and NNR are continuing to decline at an alarming pace.

Engineering is compensating for lack of stability, quality, and increased tech debt with large estimates to account for the extra and unknown level of effort each new feature now requires - these estimates are not inflated, they are reflective of a real issue.

These massive estimates from engineering mean that there is very little the business can do to respond to market pressure with any sort of agility and the competition continues to race ahead.

No one is clear what the actual problem is, but there is a broad directive from the top to "fix it". This unfocused and abstract pressure negatively impacts employee retention and productivity.

Level 6

Deeper into the Chasm

Missing expertise, strategic gaps, and misalignment begin to show across the organization.

The lack of an overall effective strategy to drive org structure, operating models, and compensation structure begins to drive dangerous and toxic patterns.

Anywhere from 40% to 80% of the engineering capacity is tied up in maintenance, tech debt, and defect remediation.

Around this time, there may be a call for a new UX as a quick fix to entice users and address declining retention.

Leadership is becoming aware of gaps in understanding around cost, impact, and organizational maturity. There may be a renewed discussion about Agile or Digital Transformation.

The engineering organization is now working well over 100% capacity, investing personal time on weekends, and burning out rapidly – all without making significant progress.

Your people are committed and smart. They recognize pieces of the problem and are actively proposing ideas and possible solutions. They may not be cohesive in their collective approach to the issues, but their drive speaks to the loyalty and culture that grew with your company, even in the face of the disfunction you now face.

NRR and NNR are continuing to decline. Other indicators trend as before.

Processes to estimate cost and value of initiatives are missing leading to overworked staff with constantly shifting priorities and missed revenue and retention goals.

The brittle nature of the existing technology makes simple concepts like a new UX extremely difficult.

A negative feedback loop is formed around the dynamic of short-term incentives for sales and product being at odds with the need for engineering to address technical limitations to allow for long-term modernization and new feature development. This amplifies the challenges and exacerbation of all people involved.

The broader business and the Engineering org lose trust in each other.

Level 7

Brain Drain and Platforms

A year or two may have passed since initial indicators of a problem and the situation has likely deteriorated. Leadership and investors may panic. It’s at this point that the company will usually seek outside perspectives.

You may also hear the words “platform" or "re-platform" being thrown around, but everyone has a different definition of what this means.

There has been a "brain drain". People (often the “heroes”) with deep understanding of the highly bespoke systems of the company begin to leave and take their knowledge with them. There may have also been turnover in senior leadership across product, technology, and sales.

Product may interpret the concept of "platform" as a new commercial vision of the existing solutions.

Technology/Architects may interpret "platform" as a new foundational technology suite that enables a new product direction.

A debate has started on how to fund the "platform", even as there is still no consensus on what the "platform" even is or how much effort may be involved.

There is a general understanding that there needs to be a foundational shift, either in terms of the commercial solution, the underlying technology, or both.

New hires struggle to understand how to make sense of the existing infrastructure and solutions.

Most do not clearly understand how to prioritize funding, capacity, and time in order to transition toward this new vision because the organization misalignments and strategic gaps that created this situation are still present.

Enablement technology and revenue generating technology have never been differentiated before and the lack of distinction is creating confusion about capacity.

It becomes clear that every dollar and day spent on enablement (like a platform or DX) is a dollar and day not spent on feature work, setting the company even further behind and risking even more revenue loss.

A catch 22 is beginning to show in terms of a "platform" shift, the negative consequences of which are dramatically exacerbated by how much time has already been lost.

Level 8

Crossroads

Throughout this process the company may look to de-risk and solve the issue by throwing funding and people at the problem.

If cash flow and reserves are not enough, the company may become interested in de-risking through institutional investment.

If you take investment, it will likely include an initiative to drive change (including leadership)

An investment at this stage may buy you more time to address the issues that have driven you into the chasm.

Investor due diligence points out large technology ownership and tech debt costs that result in poor valuation and unfavorable terms.

Investment at this stage may offer time but does not directly address the problem.

The way funds are being allocated is reflective of the way the company has traditionally done business, which means it’s part of the problem.

It may slow your speed through the chasm, but won’t stop it unless coupled with a strategic shift.

Level 9

A New Strategy

At some point between the tipping point and now, usually after outside perspectives are brought in, most companies will conclude that a new technology strategy that prioritizes enablement, modernization, tech debt, and analytics is necessary to cross the hidden chasm.

The notion of the “platform” is revisited, and a compromise is reached between a strategic, commercial, and technical definition.

Architects and technology teams will begin to rally around this concept and work through the basic plumbing of such an approach by defining modern solutions to questions like:

How do we have common security and users across the platform?
How do we move data between partners, acquisitions, and internal systems?
How do we reduce duplicate data entry for users?
How do we create a unified experience across our solutions using the platform?

Product and leadership will begin to look at the platform strategy to recover lost market share and accelerate growth through new features and very often a targeted M&A pipeline.

The organization is still unclear about how this will be funded.

Many of the organizational maturity issues, though better understood, may still be present.

The chasm isn't just a technical issue and these will require attention for the company to succeed.

While at a high-level your team understands elements of the platform strategy (internal names may vary), none of them have done this before and there is a lot of expensive trial and error involved. Consequently, the platform itself is being viewed as a project rather than a value stream and general strategy. Projects end, value streams don't.

Level 10

You need help to climb out of the chasm

Five major risks stall or stop progress despite this impressive turn-around in terms of rallying around a more future-centric vision.

Eventually, if the company cannot address or get ahead of these risks, it will spend millions over years before either stalling out in terms of market growth, slowly becoming irrelevant, or fail outright and be forced to restructure through new leadership.

If cash flow and reserves are not enough, the company may become interested in de-risking through institutional investment.

Expensive consultants, vendors, and SaaS commercial solutions are being discussed or evaluated.

Company leadership may be discussing migration or upgrades for customers out of band and without context of the actual work being completed.

There have been some technical leadership changes.

There have been some business development leadership changes.

There may have been some product leadership changes.

The organization is rallying around a new vision, even as that vision is still not crystal clear.

There is a general openess to new ideas and ways of working.

1. Strategic Transition

While the platform is being designed as a modern technology with mature strategies, there is no clear plan or path to get from the current state to the new state. This is because the platform is being viewed as a destination rather than a strategic shift.

2. Enablement Investment

The issue of prioritizing enablement or feature investment has grown, as re-platforming and its internal adoption demand significant initial costs. The business cannot halt feature development to create a new platform and product.

3. Maintenance

Platform (enablement) technologies still incur ongoing operational costs for upgrades and maintenance, similar to any product, but without generating revenue. Often underestimated, this leads to slow development, increased technical debt, and poor adoption, potentially costing millions of dollars over several years.

4. It's Not Magic

The organization's crisis wasn't just technological but also due to process flaws, leadership gaps, misaligned incentives, and skill shortages, exacerbating the issue. Without addressing these, a new platform approach alone won't fix the problem.

5. Fatigue

Building a platform to climb out of the chasm is a multi-year effort. Impatience leading to premature promises of new features or M&A, risks worsening NRR and derailing progress.

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