A foundational shift is underway in the enterprise software industry, driven by the rise of generative artificial intelligence (AI). A new study released on Monday by the consulting firm AlixPartners warns that this shift is putting significant pressure on more than 100 mid-market software companies with annual revenue below $10 billion. The study highlights how AI is not just a feature but is becoming the core of software functionality, transforming the traditional software-as-a-service (SaaS) model. The most advanced applications of AI today include copilots for software coding, such as Microsoft's GitHub Copilot, and support chatbots like Zendesk's Answer Bot. However, generative AI is rapidly advancing from these narrow use cases to the broader "logic and presentation layers" of software. AI agents are now capable of handling complex tasks, such as scheduling meetings, analyzing reports, and even writing code, with minimal need for a graphical interface or structured workflows. This capability has the potential to render some traditional SaaS layers redundant, leading to a significant reevaluation of the SaaS business model. AlixPartners identified two main pressures on mid-sized SaaS vendors. On one side, AI-native startups are entering the market with lower costs and faster iteration cycles, able to replicate traditional SaaS applications at a fraction of the cost. On the other side, tech giants like Microsoft and Salesforce are investing heavily in AI, integrating it into their broader platforms and offering bundled functionality at lower price points through economies of scale. This dual threat is causing a "big squeeze" on mid-sized companies, which are seeing sales growth slow and customer loyalty wane. The data is stark. High-growth companies decreased from 57% in 2023 to 39% in 2024, and industry analysts predict this will further decline to 27% in 2025. The median net dollar retention rate (NDR) for enterprise software companies, a key metric for customer stickiness, dropped from 120% in 2021 to 108% in the third quarter of 2024. Klarna's decision to drop Salesforce and Workday in favor of smaller AI-powered vendors and in-house agents is a telling example of this trend. This pressure is forcing traditional SaaS companies to adapt. One key area of focus is rethinking their business models. For instance, Salesforce and ServiceNow are experimenting with outcome-based pricing for AI agents, where fees are tied to results rather than user counts. This approach aligns better with the value AI can deliver, potentially making it more attractive to customers. Half of the 122 mid-sized software companies surveyed by AlixPartners expect significant changes to their business models in the next year. However, the transition to AI is not without its challenges. Running AI agents can be computationally expensive, leading to higher costs and potential profit margin compression. To mitigate this, software providers may need to adopt more efficient inference architectures and infrastructure strategies. Additionally, the recent trend of higher interest rates and tighter capital markets has placed a greater emphasis on profitability, not just growth. Many SaaS companies have already responded by cutting costs, optimizing their portfolios, and rethinking their pricing strategies. To survive and thrive in this new landscape, the study suggests several strategic imperatives. Differentiation must now come from speed, relevance, and efficiency, rather than UI design or legacy feature sets. Companies need to be agile and responsive to the rapid changes in the AI ecosystem. The era of traditional applications is evolving into one where agents carry out tasks autonomously, and only the most adaptable companies will succeed in making this transition. Industry Evaluation and Company Profiles: Industry insiders and experts agree that the integration of AI into enterprise software is a game-changer. They caution that while the potential for AI to revolutionize business processes is immense, it also poses significant risks to established SaaS companies. Those that fail to adapt could be left behind as the market shifts toward more efficient and cost-effective solutions. AlixPartners, a global consulting firm specializing in operations, performance improvement, and technology, has a strong track record in advising businesses on strategic transformations. Their latest report underscores the urgency for mid-market SaaS companies to reinvent themselves. The firm's insights are particularly valuable given the complex interplay between technological innovation, market dynamics, and financial constraints that these companies face.