Ascendant, another “professional services firm” putting their name out in Tokyo.

As a bona fide CPA, I have had some experience with what are called “professional services firms”, which has nothing to do with anything X-rated. A trend in recent years has been for ex-Big 4 audit firm managers to set up a boutique numbers firm that allows companies to outsource certain finance functions for a price.

The one I worked for operated on a dispatch (haken gaisha) basis, said they described their business as so: “we solve problems, implement initiatives and help drive change through all levels of businesses.” So is it an accounting firm, is it a numbers guy firm, is it a gun for hire? No one really says because no one can quite define it. Solve. Implement. Drive change through. Like that.

With these sorts of companies, the ideal is to have the client “reach out” and rely on the company for staffing needs that used to be considered in-house tasks. A software company I had an assignment with in 2007 outsourced all the basic functions of general ledger production to the firm, and then the firm had to scramble to find the talent to do the job. It ended up costing the outfit probably 3 times what it should have, had they just gone the traditional route and hired their own person. (I think the ultimate problem was the top guys in finance were playing above their league, and so anyone brought in quickly figured that out, and left. No career path up when your boss is a dunce.)

So I was surprised to see Ascendant pitching itself in the Japan Today this morning. I interviewed with this firm, twice, I think, in summer 2009. Three of the four main people I spoke with (in those two visits) are no longer with the firm. One guy was ex-Deloitte, and his wife is in Japan on a diplomat visa. One was someone either from America with the giri giri CPA (state search of Maine did not check out, but holding themselves out as CPA). Another was a Class-A professional who could be his own auditing firm if he chose.

Doing my own due diligence, I realized that this had been an accounting firm, an old style, American-style one where some grey beards put their services out to foreign companies entering Japan; and grafted on to it was one of these contemporary “professional services firms” where the people spend a lot of time trying to keep both business and talent in the door.

Here is my comment on Japan Today:

I don’t know for absolute certain, but the word in the accounting community is that the business model works like this:

1) Rely on ACCJ to funnel business opportunities to this company, particularly smaller, overseas outfits looking to do some business in Japan.

2) Convince the foreign company that it’s better to outsource their finance function (including HR & payroll) to Ascendant than to have an in-house team in Tokyo.

3) Hire people at cut rate to service this now-outsourced business. The article mentions 10-15% turnover on a staff of 80. Which piece of your now-outsourced company functions are going out the door with that turnover? 150 multinational companies and a staff of 80. Hmmm.

4) Once the foreign company signs the outsourcing deal, they’re somewhat stuck. If you had hired the wrong in-house team, you can try to make adjustments. But if you outsource, your remedy is really just breach of contract. (Remember, you signed up in the first place to save money and avoid legal and financial headaches.)

The business model works fine as long as everything works right. If something doesn’t work right, for whatever reason like turnover, it can be a mess. This is why I believe these kinds of firms are “unique”. Once it goes beyond something that looked like the traditional accounting firm into some new “professional services” firm, there are too many moving parts.

What I don’t like about the business model is that promising all things to all people doesn’t work. This is what that firm I did haken gigs in 2007 used to do. “Well, let’s do whatever the client needs.” Yes, of course. But the client needs to know what they need. Plus, they better not be using your services as gun-for-hire to do something that you would get in hot water for if you were solo. (You also see that last one going on in the mortgage foreclosure industry with the paperwork mills set up by lawyers, by the way. It’s not a trend limited to one industry.)

The idea that someone is saying, about an 80 person shop, yes we have 12%-15% turnover a year, is not comforting. Or that your receptionists are now consultants, although I am sure there is a definite talent base among receptionists in the Heisei-era freeter world of limited job opportunities. I happened to know from personal, interview experience about the turnover. I also know from education about inventory turnover. Fifteen percent is saying that every six years, you have an entirely new staff.

[Update: of course, this is not true if it’s the same 15% going out the door—it’s an accounting joke playing off the notion of staff as inventory. But you get the notion. If you are providing professional services out of a small shop, you don’t brag about employee turnover. You don’t even bring it up.]

At a large accounting company like Ernst, the turnover numbers are the journeymen (women) who get their time in on audit and then try to land corporate jobs at the places they used to audit. There is a base in each discipline that stays there, year after year. In old style accounting firms, they were of course smaller, but they kept all their people. When I worked in money management back in Princeton, the firm kept all its people. They weren’t into this thing of, you know, “turnover”. “Up or out!” “Up or out!” “Bend over or out!” and so forth. Turnover begets more turnover. It gets clients upset.

Most of Tokyo’s accounting talent base are ex-Eikaiwa or ex-bookkeepers without the proper accounting training. This is why it’s so hard for companies to find and staff. They[, the base referenced above,] become numbers guys, and their ex-Eikaiwa buddy– now a headhunter for the Tokyo branch of a big name search firm–sticks them in roles and they move around. If you actually display qualifications, real authentic ones that actually did come from a state, you become “obaasupekku” ( オバースペック )—overqualified. (This is easier to do if you’re not a Japanese or don’t look like a Japanese, by the way.)

So I wish that little firm a lot of hope [courage] and success with 12-15% turnover. It looks like two greybeards who’d like to cash in the business, and Advantage Partners isn’t knocking on the door. So they’ve gone the “professional services” route, which like I say above, has its share of pitfalls.

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One comment

  1. hoofin · October 25, 2010

    The more I look at this, it sounds like the firm’s two main heavyweights are cashing out, piece by piece, to a younger guy that they’ve named Representative Director.

    If there are 80 people working, at 4 million yen a pop, the payroll is 320,000,000 yen. One hundred fifty clients paying an average of 4 million a year for the service is 600,000,000 yen revenue. The action must be going on in the 280 million yen a year difference, some of which covers rent and overhead.

    Tan probably builds the sweat equity by how much he can squeeze either side of the revenue and expense items. The older partners get cashed out by some formula where they get to sell off a certain amount of their shares to Tan or another equity holder every year.

    Probably the reason the people don’t stay is that they quickly realize that they are being squeezed (paid less than market) in order to buy out the long-term partners. They are building up a “partnership” where they themselves are not partners. Just a guess why the turnover is what it is.

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