It is an interesting, yet weird approach that we are going to discuss today. New businesses definitely come out of market need, rising demand, and the availability of new opportunities. We have seen this in every industrial revolution and evolution. However, in modern business studies, we are seeing a lot of more interesting things which we have not seen ever before. In the recent evolution of artificial intelligence, we are seeing massively growing opportunities for new companies in different fields. It is not only companies like Anthropic and OpenAI that are growing. The opportunity is everywhere.
As we see these new companies growing up, we must understand the fundamental things that happen when larger enterprises have grown massively and are already making fortunes. We must examine how the operational landscape generated by larger enterprises creates friction, and how that exact friction gives opportunity for new businesses to grow much faster than their own existence. Even the largest consulting companies have been having a hard time retaining talent and keeping pace with the evolution of artificial intelligence. For RevOps fundamentals, see our complete guide to Revenue Operations.
In a larger lens, how does this happen? This is where my foundational analysis shows a different perspective. When enterprises start growing, the operation grows so immensely and massively that they become incredibly complex. The foundation that was built initially is no longer supporting the same amount of operations. To run and retain the operation, they start wrapping new solutions around that original foundation. They wrap different approaches and software to meet the need of organizational scaling as it grows.
Think for a second. If you have to build the world’s tallest building today, the foundational principle is not that you can use an existing second or third tallest building, build around it, and stack on top of it. You have to build a completely new foundation. The foundational barrier analysis is very important to retain the ideas of crazy enterprise success. When enterprises start wrapping different solutions around the original foundation, things start getting more complex. This is never realized until a couple of decades have already passed. Sometimes it is not realized at all because it is so complex to really understand what is happening inside an enterprise.
If an organization has forty thousand employees across the globe, that shows a large amount of revenue is coming in. But to support that revenue, the organization usually takes either a centralized or decentralized approach. Either they act like a headquarter running every single rule book, or they let it decentralize based on the region. Both strategies work, but when you are doing so much around a legacy core, your foundational thickness of friction increases massively. Your process becomes slower. You cannot ignore the fact that a small mistake can cost a fortune to the organizational balance.
Because the foundation changes are not simply achieved in months, the enterprise has to make larger, riskier moves. I have seen cases where an organization decides to change the software running its core processes, and offboarding the old software to onboard the new software requires years of effort, millions of dollars, and hundreds of thousands of man hours.
This exact enterprise organizational structure is giving birth to new businesses.
The Cost of the Legacy Foundation
The friction caused by wrapping solutions around an old foundation is known in the industry as technical debt, and it acts as an invisible anchor on enterprise growth. McKinsey research found that Chief Information Officers estimate technology debt amounts to 20 to 40 percent of the value of their entire technology estate before depreciation. Furthermore, 10 to 20 percent of the budget earmarked for new products gets redirected to resolving debt related issues instead.
The financial drain of maintaining these old foundations is staggering.
Statistical Impact of Enterprise Friction
- Global Productivity Loss: Projected 5 trillion dollars lost by 2030 due to unmanaged technical debt.
- United States Corporate Cost: 2.41 trillion dollars wasted annually maintaining legacy systems.
- Individual Enterprise Waste: 370 million dollars wasted annually per enterprise on outdated architecture.
- Budget Diversion: 60 to 80 percent of enterprise technology budgets are spent merely maintaining aging systems.
- Speed Penalty: Teams managing significant technical debt operate 30 percent slower than agile teams.
When 80 percent of an enterprise budget is keeping the lights on, there is very little capital left to innovate. The speed to process any request used to not be a big deal for organizations. But now it is. How quickly you can process information, act upon that, and provide valued outcomes to your customer is highly appreciated. If a customer requests something and has to wait weeks to just go through many hoops and eventually land on a very large quotation, they will leave. Customers are not looking for that anymore.
The Birth of the New Business
Does this mean the enterprise weakness becomes an opportunity for others? Of course. That is the fundamental understanding. The enterprise is choking on its own failure to upgrade its foundation, and this creates a vacuum in the market.
This dynamic was brilliantly codified by Harvard academic Clayton Christensen in his framework of disruptive innovation. The framework explains how outstanding companies can execute best practices, listen closely to their most profitable customers, and still lose their market leadership to unexpected competitors. The core paradox is that an organization capabilities define its disabilities. The very processes, approval matrices, and centralized rules that make a large enterprise successful in its core market render it entirely incapable of moving fast enough to capture new opportunities.
New businesses are incredibly smart. They identify that large organizations are paralyzed by decision latency and structural friction. These agile startups enter the market targeting the underserved or frustrated customers that the enterprise ignores7. Because the startup does not require the massive yearly sales volumes of the incumbent enterprise, they can focus entirely on speed, artificial intelligence integration, and rapid iterations.
By the time the enterprise realizes the startup is a threat, the startup has moved upmarket. The new business captures the exact opportunity and massive revenue streams that were originally part of the enterprise DNA. The enterprise funded its own disruption by refusing to fix its foundation.
The Illusion of Mergers and Acquisitions
To cover this vulnerability, enterprises, private equities, and venture capital firms keep looking at the market and acquiring these agile businesses over time. Companies spend more than two trillion dollars on corporate acquisitions every year in an attempt to buy the innovation they cannot build themselves.
But how is the future going to look? Is this a worth it way to expand an enterprise? Of course not.
Acquiring a portfolio versus enhancing your own portfolio have two different directions. Enhancing your current portfolio does not mean the portfolio needs to be larger and complex. Acquiring a portfolio does not mean it is a growth to the enterprise. It comes with its own processes, costs, and a mindset culture which may or may not fit in the organization. According to Harvard Business School research, the failure rate for mergers and acquisitions sits between 70 and 90 percent.
When an enterprise acquires a fast moving startup, it attempts to bolt that new business onto its existing, friction heavy foundation. The moment the startup is forced to adopt the centralized processes and sluggish governance of the acquiring enterprise, the startup loses the exact speed that made it valuable. You cannot fix a crumbling foundation by stacking a shiny new building on top of it.
The Executive Conclusion
The conclusion is that the enterprise opportunity can become a threat to its own existence if it is not taken care of well. Wrapping around the foundation is one way to go, but just like building the next world tallest building, it is highly important to build a new foundation and eventually sunset the existing one. You cannot keep the legacy in your own structure.
As leaders, we must recognize that if we do not intentionally dismantle our own technical debt and rebuild our revenue operations from the ground up, we are simply keeping the seat warm for the agile startups being born today. The friction we refuse to eliminate is the exact blueprint a new business will use to take our revenue tomorrow. We must stop wrapping solutions and start building new foundations.
