Trusted advisers and their firms could be disrupted by emerging tech startups, and there are reasons to believe that the threat of disruptive innovation may be growing.

In the past, advisers have faced many threats and have successfully responded.

But the threat of disruptive innovation is different than other threats. If advisers use the same approaches to managing risk that they have used in the past, advisers could make themselves even more vulnerable to disruptive innovation.

Common Threats to Advisory Firms

Trusted advisers are no strangers to risk, and threats to their roles and firms are not new.

Familiar threats to advisery firms include the following:

• Competition: The public advisory services are highly competitive with one another, and firms must constantly compete with each other to attract and retain clients and talent.

• Regulations: Public advisory firms are subject to a wide range of regulations, including data retention and security requirements, licensure requirements, quality standards, ethics rules and tax laws. Compliance with these regulations can be time-consuming and costly.

• Litigation: Consulting firms can face lawsuits from clients, regulators, and other parties. These lawsuits can be expensive and damaging to a firm's reputation.

• Technology: The use of technology for trusted advisory services is growing rapidly, and firms that do not keep up with the latest technology trends may fall behind. Threats from disruption by solutions using artificial intelligence are also increasing.

• Talent retention: Attracting and retaining talent is a major challenge for firms. With a high demand for skilled professionals, firms must offer competitive compensation packages and opportunities for career advancement.

• Reputation risk: Consulting and accounting firms rely heavily on their reputation to attract and retain clients. Any negative publicity, such as a scandal or unethical behavior, can have a significant impact on a firm's business.

Firms have responded to these threats with risk management practices and standards. Big consulting and accounting firms have optimized these practices into sophisticated systems for ensuring quality, profitability, and efficiency.

Counterintuitively, optimized operational models at consulting and accounting firms could cause professional service delivery models to be more vulnerable to disruption from threats outside of their traditional ecosystems.

A Different Threat to Trusted Advisers

Firms with optimized operational systems could find themselves in the unexpected position of losing market share after listening to their best customers and providing what appear to be only the highest-value, most profitable services.

While firm leadership focuses efforts on optimization of the most profitable services requested by the best clients, new companies that serve low-value customers with initially poorly developed technology are working to rapidly improve that technology incrementally until it is poised to quickly take market share from the leading firms by surprise.

The vulnerability to innovative disruption created by optimized operating models is sometimes called the “Innovator’s Dilemma.” The challenge presented by this vulnerability has been studied by some of the most successful large firms.

Disruptive Innovation for CPA Firms

CPA firms may notice emerging competition from non-CPA firms, such as technology startups like Vanta, Drata, SecureFrame, Clarus R+D, TaxRobot, and TaxFyle.

These startups offer products that help businesses obtain a SOC 2 report or cyber compliance assessment, calculate a tax credit, or comply with tax filing requirements.

These startups present themselves as a simplified solutions, and they claim to provide convenience and transparency. They try to deliver outcomes faster and cheaper than CPA firms. And they are working to continuously improve their products.

CPA firms and consultants appear to be reacting by providing better service to more demanding, sophisticated clients, leaving the lower value market segments for the startups.

The startups, meanwhile, are expanding the lower market segments by advertising their services to businesses that were previously perceived by CPA firms as too small and too unsophisticated to justify the efforts. Consequently, the startups are growing their market share and improving their products without heavy competition from CPA firms.

If these startups improve their products rapidly enough, they will soon have the capability to satisfy larger, more sophisticated organizations and CPA firms could find themselves replaced by a productized, more convenient, more affordable option.

CPA firms and individual trusted advisers would be wise to identify these threats and to consider their responses to them. It’s better to disrupt yourself than to be disrupted.