Zenefits: A Lesson in Disruption

In October 2013, I read a tweet from Box CEO, Aaron Levie, which to me seemed like not only a hugely successful entrepreneur sharing a simple piece of...

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In October 2013, I read a tweet from Box CEO, Aaron Levie, which to me seemed like not only a hugely successful entrepreneur sharing a simple piece of advice, but a call to action to the SaaS community to be disruptive – “Tip: Take the stodgiest, oldest, slowest moving industry you can find. And build amazing software for it.” More recently, when I began to hear about Zenefits, this new rising star in SaaS that is growing at an unprecedented rate and causing mayhem for the stodgy, old, slow health insurance industry, I was instantly reminded of Levie’s advice and struck by how Parker Conrad and Zenefits had done just that.

Aaron Levie Tweet

Zenefits is an incredibly disruptive company on a number of levels and is reaping the benefits (pun intended) having reached $20 million in run-rate revenue by the end of 2014, $83.6 million in funding raised, and growing to 450 employees since its launch in May 2013. So what can Zenefits teach the rest of us about how to be not only disruptive but successful while we’re at it?

Find an antiquated, paper-based business process and automate it.

Zenefits, for those of you who haven’t heard of it yet, is a HR platform that takes previously cumbersome, admin-heavy HR processes like onboarding, payroll, benefits, vacation time, etc. and makes them quick and easy. Zenefits is built as a single interface that plugs in to your existing providers so that you only have one system to update when an employee’s circumstances change. The idea was apparently born out of CEO Parker Conrad’s resentment for having to do these tasks in his previous company and even having to fax the form to its health insurance provider when signing up a new employee. Simplifying this process for the end user and taking it fully online means that business owners, to whom these tasks normally fall in smaller companies, can spend less time on paperwork and more time focusing on growing their business.

Businessman drowning in a sea of paperwork raising his arms for help with a blank empty thought or speech bubble above

As Conrad put it when pitching at TechCrunch’s Disrupt NY 2013 Start-up Battlefield Finals, “we can start to replace people and paper with software and technology”, taking advantage of the fact that businesses are generally happy to outsource administrative functions and keep the strategic functions in-house. It also helps the business processes that Zenefits have chosen to automate are common to pretty much every industry vertical and size of business, facilitating its incredible growth. Furthermore, Zenefits saw the regulatory changes in the health insurance industry under the Affordable Care Act (Obamacare) as an opportunity where other insurance brokers saw it as a threat. The programme imposed even more paperwork on employers, needed to help the government figure out which employees qualified for subsidies – so it’s Zenefits to the employers’ rescue once again with a simple, automated solution to their problem. If you had to double take just now when I referred to this hotshot SaaS start-up as an insurance broker, I can understand why, but this isn’t a mistake, and it leads us to the second major lesson in disruption to learn from Zenefits.

Don’t just automate the process – revolutionise the business model.

An important point that I failed to mention when espousing the advantages of Zenefits game-changing HR software is that it is free. In order to build a SaaS solution to HR’s paperwork headaches, Parker spoke to health insurance brokers about how the system worked, why the paperwork was so complex, why it was required, etc. and in doing this learned about how insurance brokers earn generous commissions from insurance companies for pointing employers in their direction. The same could be said for payroll companies who pay a revenue share for sending business their way. The light bulb moment came when Zenefits realised that if it could make it so seamless and easy for employers to purchase health insurance and payroll services via their platform, it could make such healthy revenues on the kick-backs that it could afford to offer its platform for free.

Vector crowdfunding concept in flat style - new business model - funding project by raising monetary contributions from crowd of people

The real key here is in developing a competitive advantage. The idea of automating paper-based processes with really cool software is great, but it is easily replicated. What Zenefits has managed to do is to leverage its really cool software as a kind of Trojan horse to get it in to a position where it can sell more lucrative services – not unlike Microsoft’s angle with cloud storage. In doing this, Zenefits has managed to gain a price-based competitive advantage over other SaaS providers in the space like Trinet in that Zenefits is free, and a service-based competitive advantage over traditional insurance brokers in that Zenefits offers heaps more services and added value for the same price. So, both the solution and the business model care disruptive but what really has the insurance brokers shaking in their boots is Zenefits’ astounding growth and traction in the market – and therein lies a further lesson in disruption.

You can’t be truly disruptive without scale.

In November 2014 Zenefits was banned in the State of Utah when traditional insurance brokers successfully lobbied the Depart of Insurance on the basis that it constituted unfair competition for Zenefits to give away its software for free and should charge for its use despite the fact that 85% of Zenefits’ users don’t take advantage of the insurance brokerage functionality. Zeneifits is likely to have this decision overturned but the interesting point here for us is not the point of law but the fact that Zenefits clearly has the industry running scared to such an extent that it is turning to regulators for protection. If Zenefits was delivering its slick user experience and innovative business model to a handful of customers, this reaction would be unlikely – but the reality is that Zenefits is growing at an astonishing rate that outstrips that of previous SaaS superstars like Salesforce and Workday and is drawing a lot of attention.

Zenefits’ management have not been shy about setting BHAGs (Big Hairy Audacious Goals) for themselves and constantly revising them upwards. They have massively scaled their marketing, sales development, and outbound sales functions and built an efficient sales engine that is driving unparalleled revenue and customer base growth to bring them to over 10,000 customers in less than two years. They have secured the funding required to overcome the cash flow problems associated with the SaaS monthly subscription business model and upfront customer acquisition costs and further fuel their expansion while continuing to develop the product and invest in new features and functionality to make their customers stay put. All of this means that the incumbent providers are losing customers, losing money, and scampering to find a way to fend off the attack of this unruly upstart that refuses to be quietened. If that’s not disruption, I don’t know what is.

by Michael Cullen @michaelcullen87

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3 comments

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  3. Michael Lujan

    The market will look very different 6 to 12 months from now when traditional agents have the same tools, plus years of insurance expertise and deep relationships. Of course, some agents are slower to adopt new technology but most I’ve met are more than ready and already armed with their own tools. See also, Namely – One of many other Zenefits-like players entering this space.

    Here’s my interview with their CEO:
    https://soundcloud.com/michael-lujan-8/zenefits-ceo-interviewed-at-ncebc-michael-lujan

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