AI agents aren’t lacking intelligence – they’re lacking context

A growing narrative in the tech industry suggests that AI agents will replace traditional SaaS applications – autonomously handling business software workflows, while compressing entire categories.

But while AI agents are rapidly being deployed across enterprises, this framing misunderstands how enterprise systems actually work.

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Nic Palmer

Senior Director of Customer Engineering, International at Elastic.

Without the right relevance and operational grounding, AI can execute tasks poorly. Instead of reliable and accurate outputs, it may generate hallucinations, results that appear plausible but are incomplete, misleading, or downright erroneous.

This is risky business. Errors can quickly cascade through operations: a misjudged credit risk model could approve fraudulent transactions, exposing the company to financial loss and regulatory scrutiny. Healthcare support agents might follow recommendations that inadvertently breach privacy rules or give harmful medical guidance.

Even strategic decisions, like supply chain sourcing, can go off track if predictive models misinterpret market trends, resulting in lost revenue, wasted resources, and public backlash.

In short, without proper context, AI can make flawed assessments and drive poor decisions. And the consequences are real: financial losses, regulatory breaches, and damage to brand reputation.

This underscores the continued importance of human oversight and thoughtful deployment. AI systems need more than raw model capability. They require an environment that nurtures relevance, ensures operational alignment, and maintains governance.

To address this, organizations must take a hard look at how they prepare AI to work and help it perform at its best. For many, the solution lies in an approach known as ‘context engineering’.

enterprise environments. Analysts at Gartner define it as “designing and structuring the relevant data, workflows and environment so that AI systems can understand intent, make better decisions and deliver contextual, enterprise-aligned outcomes.”

Consider a customer support agent handling a billing dispute. To respond usefully, it needs access to the customer’s account history, recent transaction logs, product documentation, and the company’s current refund policy – all at once, and in the right order of priority. Without that engineered context, even a highly capable model will produce responses that are generic at best, and misleading at worst.

Many AI agents today have powerful models but lack consistent access to operational context. They don’t replace the underlying platforms, data stores, or operational systems businesses rely on; they sit on top of them and are only as good as the context those systems provide.

Solving this isn’t just about better models. It requires a platform that can unify structured and unstructured data, retrieve the most relevant signals across systems, and give engineers visibility into how outputs are generated so they can identify gaps and iterate with confidence.

Organizations that implement context engineering effectively can eliminate much of the friction caused by managing multiple tools, while ensuring AI agents operate reliably in complex, real-world environments.

In short, context engineering spans every layer of the stack. When it works, AI becomes a powerful, trustworthy layer on top of existing enterprise systems, not a replacement.

developers to build complex, multi-step AI workflows, tailor agents to specific domains like medical, legal, and financial services, while ensuring outputs meet requirements for tone, reasoning style, and compliance.

It also gives humans a vital ongoing role. Relevance and context aren’t static; they evolve as business conditions, regulations, and user needs change. That’s why AI leaders need feedback loops, monitoring, and human-in-the-loop oversight, so agents can adapt, maintain compliance, and keep delivering value.

The takeaway is clear: get context right, and you improve more than AI outputs. You improve the decisions, efficiency, and resilience of the people and teams who work alongside it, without replacing the foundational systems that underpin them.