Yesterday, it was announced that Zenefits has sold its book of insurance business to OneDigital in an effort to re-focus the fledgling start-up.  From our perspective, this is a positive move for our industry in that it validates our historical position that the sale and servicing of employee benefits is a complex and highly personalized business and must be handled by local resources with deep expertise and consulting abilities. We also believe it is positive for the industry in that it returns people to and keeps people in their traditional swim lanes – operating where they perform best — benefit brokers handling the complexities of benefits and HR technology companies handling the complexities of HR administration.

In case you’ve not yet seen the details of this announcement, here is a quick and dirty summary of what recently transpired.

• The new leadership at Zenefits has decided to focus their energies on the technology side of the equation and no longer wants to be in the benefits broker business. In a press release yesterday, Zenefits’ new CEO, Jay Fulcher, shared the following comments about this new focus, “We realized that digital brokerage in an online fashion and not in person is somewhat resonant with really small companies, but as you begin to go beyond that the digital brokerage value prop is not nearly as useful as having local, embedded brokers.”

• Zenefits sold their insurance business (clients, revenue, employees) to OneDigital in an asset purchase. We’ve been told that this purchase was somewhere in the neighborhood of $40-$50MM.

• Zenefits now becomes a SaaS provider of HR Technology and will license it to employers for a pepm subscription fee. With this transition, they become more direct competitors of companies like Employee Navigator, Ease Central, Flock, and others that have historically distributed their HR technology products through brokers. However, with an embedded payroll solution, they also begin to look, feel, and smell an awful lot like ADP, Paylocity, Paycor, etc. Heck, just look at their new website and tell me it doesn’t look an awful lot like a traditional payroll/HCM company (ADP, Paylocity, etc)!

• Zenefits will distribute this software through EB agencies, but will also have a direct sales force and will be selling to employers directly.

Now, that you’re all caught up on the facts, we’d like to share some of our initial impressions and perspectives.

• Technology – One of the primary things that Zenefits had going for themselves over the past several years was their front-end technology. This was Parker Conrad’s (Founder/original CEO) strength. He built a nice mousetrap and won a lot of business with the proverbial “shiny thing in the water.” The user interface is very strong and it checked off a lot of boxes as it relates to what an HR professional would be looking for, including payroll (more recently), HRIS, PTO management, Onboarding, Benefits Enrollment, Offboarding, etc. However, as we have warned both agencies and employers for years, with Zenefits, you need to be careful about buying sizzle without actually buying the steak. The Achilles Heel of Zenefits has been, and continues to be their back-end systems and processes. I am certain that the new executive team at Zenefits will be working diligently to fix the back-end and fully automate those processes, but it will take some time to have the steak delivered with the sizzle.

• Go To Market Strategy (Zenefits) – Zenefits has now rebranded themselves (essentially dropped the origami bird) and are focused on becoming strictly a SaaS technology company. To be honest, this is where Zenefits originally started before Parker Conrad got greedy and felt he could commoditize employee benefits to fund his technology. That said, I do believe that Zenefits has some tough sledding in front of them as it relates to distributing their product through the EB broker community. While their decision to sell their benefits book to OneDigital is a clear and definitive message to the market, we believe it may be initially tough for them to overcome their past sins. History has shown that it is quite difficult for an organization to pivot from being the industry’s villain to quickly being seen as the industry’s white knight. I believe that they will get there over time, but Mr Fulcher may find a bit more resistance than he anticipates. There will be a great deal of initial skepticism about how far removed from insurance Zenefits really is. For example, we have learned that Zenefits’ direct sales force will bring in OneDigital when a partner broker is not engaged. This could get a little messy.

• Zenefits Pricing – The good news is that Zenefits is quite transparent with their pricing model. They have already posted their pricing for all of their modules to their newly designed. The bad news is that the pricing isn’t overly competitive. Their “standard HR” package is pretty light and includes EE onboarding, basic HR database, reporting, and document cloud. This comes in at $5 pepm ($6 if you wanted month-to-month contract, which has become the norm in the SMB space). This does not include benefits or payroll. If you wanted some additional compliance and PTO tracking, the rate bumps to $9 pepm ($12 if you wanted month-to-month). Payroll is actually priced pretty competitively at $4 pepm as an add-on. Benefits administration pricing is not shared on the website as we’re assuming that Zenefits will look to their broker partners (and the broker’s carrier partners) to assess what they might be willing to cover. All-in-all, while we appreciate the transparency of the pricing, we believe they may be aiming a little high relative to the market and new competition. 

• Zenefits Pricing (Transition) – it is our understanding that as of the time of the sale to OneDigital, Zenefits had already transitioned all current clients to a pepm pricing for their technology. Therefore, OneDigital does not have to concern themselves with the rebating challenges that Zenefits had faced since inception. Said differently, Zenefits apparently had been billing their current clients directly for technology and was no longer offering it for free.  I’m not sure this strategy had been fully implemented, but it is likely directional.

• OneDigital Implications – Certainly, OneDigital bought the Zenefits book of business for growth reasons and because that book aligned well with their existing client base and market focus. However, we do feel it has muddied the waters as it relates to their investment in GoCo, a competitor of Zenefits (tech only). For whatever reason, Digital was never able to fully capitalize on leveraging technology to help them grow their insurance book, so I’m a little skeptical that the Zenefits partnership will yield a much different result. But, absorbing the Zenefits book and relationships certainly gives them a jump-start towards that leverage.

Overall, we do believe that this is a positive move within our industry and look forward to seeing how Zenefits can tidy up their back-end processes, distance themselves from the sale of insurance, improve perceptions of their quality and focus, and add value to our industry and Human Resources. We applaud the new leadership at Zenefits and their desire to return to their original swim lane, yet remain cautiously optimistic that they will successfully transition to the quality SaaS technology provider that new leadership aspires to be.