Zenefits: Disrupting Human Resources Management
Zenefits is one of the fastest growing software-as-a-service startups of all time, using a unique model to disrupt the payroll and business insurance industries.
Zenefits is a fast growing startup that offers a human resources software-as-a-service (SaaS) platform for a variety of functions including payroll, benefits management, vacation tracking, compliance, and more. Founded in 2013, Zenefits now serves over 10,000 firms who in turn employ over 100,000 employees.
Zenefits is rapidly disrupting an old-line industry that has long been dominated by giants such as Automatic Data Processing (ADP) and Paychex. Zenefits offers a robust online platform that powers a variety of services, all of which are offered to customer firms for free. The firm makes money if and when their customers enroll in health insurance plans via the platform, acting as a health insurance broker and receiving commissions from insurance providers. The health insurance brokerage commission market is estimated to generate over $18 billion in sales annually, and traditional brokers offer their customers little in terms of support for customers other than a new health insurance plan – they certainly do not offer full HR management solutions. This freemium business model offers value to all users, but only captures value when users sign up for a certain subset of services. Even then, the value capture is not directly from the users, but rather indirectly from insurers.
Zenefits is pioneering a new model that delivers immense value to customers. By tapping into a unique revenue stream in the form of health insurance commissions, Zenefits is able to offer services such as time tracking and payroll (which traditionally have cost firms hundreds of dollars per employee per year) for free. This operating model combines two prior models – the payroll provider and the insurance broker – reducing overall cost for customers and allowing Zenefits to quickly capture market share from traditional firms. Conrad Parker, Zenefit’s CEO, has boldly proclaimed an internal target of $100 million in revenue under contract by January 31 of 2016 – an unprecedented rate of growth considering that the firm had $20 million in revenue under contract in January of 2015, and that the firm was founded less than three years ago.
In order to grow at such an impressive rate, Zenefits has focused on aligning its entire organization around delivering a strong technology product and then aggressively selling this product. The company has sought to automate and digitalize processes that have traditionally been managed on paper. Customers and their employees are able to manage a wide variety of on boarding tasks and HR management functions from Zenefits portal. This reduces c0sts (paper, shipping, processing etc.), centralizes information, and allows customers to handle more issues in a “self-serve” capacity, ultimately reducing the need for labor to support customers. Secondly, Zenefits employs an aggressive sales force with over one hundred employes. This sales force is heavily incentivized to onboard new clients, and furthermore to sign these clients up for insurance policies via Zenefits, which is how Zenefits generates revenue.
Zenefits operating model is built around reducing costs and offering a low cost service to customers. They accomplish this in two ways – first, they have combined two, traditionally separate business models (insurance with HR management services) and have cross subsidized one set of services (payroll/401k/HR management) with the revenues of the other set (insurance). This is an indirect form of capturing value for their other offerings, but has allowed the company to deliver immense value to customers. Secondly, Zenefits has effectively employed technology to minimize labor inputs and to automate a number of processes that historically have required human involvement. Finally, the management team has built an organization that is aligned and incentivized to market, sell and deliver the service to customers. Zenefits operating and business models are well aligned, and they will continue to disrupt the human resources management industry.
Sources:
Business Insider: Zenefits CEO Refutes the Naysayers
SAASTR: How We Hyperscaled Inside Sales
New York Times: Zenefits Leader is Rattling an Industry, So Why is He So Stressed Out?
Wall Street Journal: Zenefits Tries to Take the Pain Out of Human Resources
This is a great post about an innovator in a rarely discussed space.
As your post notes, health insurance brokerage is a lucrative industry and it looks like Zenefits faces a wide range of competitors. Companies like BenefitsConnect are selling software to traditional brokers so that the brokers can compete with Zenefits. At the high end of the market, Zenefits faces competitors like ADP and SAP who may use their capital to build better tools for small businesses. It will be interesting to see if Zenefits will continue to succeed as others begin to focus on the space.
Thank you for such an interesting article about a company with disruptive changes in the conventional area.
It is very clever to perform just like free-of-charge platform providers such as Facebook and Google, getting revenue from the other parts of the business. And the industry the company dived in seemed pretty conservative to me, and that’s why the company has aggressive sales force over than 100 people. I think even it would be possible to be a broker for various services with lower price, too.
What I am curious about is, do you think Zenefits can expand its market share as they have done so far? I think other competitors in the business or conventional brokers may try to apply the company’s model, even though the profit level may decrease. What would be the biggest threat for the company?
Thank you.
Awesome post! My last company was a customer of Zenefits and I can attest to the fact that its management team has been able to effectively align its operating model to encourage its employees to provide excellent customer service. The sleek interface is designed for customers to be able to serve themselves, but on the couple of occasions in which I did require additional assistance, the staff at Zenefits was extremely responsive and helpful. I’m very interested to see how the more conventional players respond as Zenefits continues to expand its footprint and becomes a more serious threat.