Zenefits spells bad news for insurance brokers but good news for your startup
Learn about why Zenefits gets 'winner' status by helping small businesses manage employee benefits for free
14 months. That’s how long it took for me to receive my last paycheck from my employer after I left to attend business school. When I first started my job, I had to attend workshops to help me navigate all the benefits I was receiving, sign up for online accounts to access information about these benefits, and still interface with our HR staff on a weekly basis to make sure I was doing everything correctly. Navigating my employee benefits was extremely complicated work, and it’s even more complicated for small business owners on the other side of it who have to set up these payroll and insurance accounts and ensure they are giving me and the rest of their employees adequate and competitive benefits. That’s why Zenefits, a company that creates software to help small businesses set up and manage their HR operations, gets my vote as a “winner.”
Zenefits is disrupting the traditional HR industry. Currently one of the fastest growing software-as-a-service companies, Zenefits has already signed up 2,000 small businesses that employ a combined 50,000 workers (source: NYTimes). Zenefits offers web-based HR software to companies for free, giving these small businesses access to health insurance, payroll, commuter and several other benefits and HR services for their employees all in one place, and all online. If the company decides to purchase health insurance through the Zenefits software, the health insurance company pays Zenefits. In 2014, Zenefits saw $20 million in revenue.
This model is bad news for health insurance brokers who traditionally fill the role of helping companies select and purchase coverage for their employees. The current health insurance brokerage market is estimated to be $18 billion. Whereas once the commission rates that health care providers set for these brokers were not publicly disclosed, the Affordable Care Act mandated that insurance providers publish their set rates. This eliminates the brokers’ control over this market and allows Zenefits to help “small businesses buy health insurance pretty much the same way people shop for airline tickets” (source: NYTimes). Zenefits collects the fees that brokers used to receive, while also offering small businesses effective HR software for free. The predictable stream of revenue from monthly premiums also makes Zenefits popular among investors, who dished out $500M in the latest round of funding in May (source: Crunchbase).
Another reason why Zenefits stands to unseat traditional insurance brokers and payroll tools is that it navigates all the legal complexities that go along with providing benefits to employees. With the passage of the Affordable Care Act, small companies are under pressure to ensure their HR programs are compliant. Zenefits promises customers that all they have to do to be compliant is to download the software, and Zenefits will take care of the rest.
But insurance brokers are not backing down easy – they are complaining to insurance regulators and in some cases even suing (source: Fortune). Zenefits has also faced recent public complaints about their software not working properly and freezing (source: Buzzfeed). Despite these complaints, Zenefits maintains 99.2% of its clients every month and claims an exceptionally high net promoter score. Zenefits is positioned to capture a large chunk of the brokerage market, continue its rapid pace of growth, and disrupt the historically stagnant HR market – all of this spells “big winner”.
NY Times: http://www.nytimes.com/2014/09/21/business/zenefits-leader-is-rattling-an-industry-so-why-is-he-stressed-out.html?_r=0
Student comments on Zenefits spells bad news for insurance brokers but good news for your startup
I completely agree with the sentiments of this post. Zenefits has found a simple way to combine many complicated processes/solutions that all employers have to have in place to onboard employees. I’m also very intrigued by their monetization model — offering their platform for free, but only charging once a health plan is involved appears to be an extremely “sticky” way to attract employers, especially employers of smaller firms.
As I look out into the future, I feel like Zenefits has left themselves open to disruption if they don’t address the healthcare/wellness (post health plan enrollment) side of the life cycle of the members on their platform. Essentially, much like Zenefits has led the way in being the go-to “HR platform” of choice, there is a simultaneous race on the wellness/healthcare side of the equation around who can build a platform that best aggregates all required health plan selection, health plan benefit, price transparency tools, wellness incentives, etc. services that an employee also needs once they have made all their initial HR decisions (Welltok and Rally are two leading contenders in this arena). I think the platform that can combine ALL HR functions – both what is needed at the initial employee sign-in and what is needed ongoing to manage heathcare costs – will be the ultimate winner in this arena. It will be interesting to see if Zenefits rises to this challenge.
I’m a big fan of Zenefits. I’m curious to see how they’ll expand their HR offerings, and if so how they’ll capture value. It seems like once they get their foot in the door, they could offer additional ERM products that would compete with Oracle and Salesforce — however I’m not sure if a Zenefits style business model would work for these types of offerings. It will be interesting to see if their customers will be willing to pay additional products as add-on services — otherwise Zenefits might not be able to continue on its aggressive growth trajectory.
I really agree with this blog post. Zenefits has definitely addressed a strong pain point in start-ups and small businesses. Many first time entrepreneurs, from a tech company to a local restaurant really do not know the first thing about HR regulations and norms and they certainly do not have the time and resources to employ an HR team. Founders need to focus on a boat load of other more important issues such as sales, funding, and hiring key employees rather than meet with insurance agents.
If I were Zenefits I would leverage all the data that can be gathered from all the small companies and do some consulting or offer different services for smaller businesses to diversify revenues. I think the services that Zenefits offers will be tremendously helpful for small companies outside of the US as well. Maybe the next step for them is to expand globally and capture the needs of small companies around the world. It will interesting to see how they expand going further.