The Alan Katz Blog

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How Likely is Zenefits to Change?

Zenefits changed CEOs the other day and its new leader declared the company’s old culture inappropriate. He promised to instill new values in the company. All well and good. But is meaningful change really likely at Zenefits?

Founder Parker Conrad is out as Zenefits CEO and David Sacks, until yesterday its chief operating officer, is now in charge. The reason: lax compliance procedures leading to investigations by Washington state and others concerning Zenefits allegedly selling insurance policies through unlicensed agents. If found guilty by Washington regulators, Zenefits could face a criminal fine of as much as $2.75 million, see some employees go to jail and potentially lose millions in commission dollars. While unlikely, that is what’s at stake.

Perhaps this situation is a result of incompetence and naiveté by the company’s management. Maybe. Then again, it could be the result of a culture that puts growth above adherence to the rules–an “act now and ask for forgiveness later” attitude–an approach sometimes applauded and rarely condemned in Silicon Valley and similar locales; unless, that is, it hurts the bottom line.

Not surprisingly then, Mr. Sacks informed employees on taking over as CEO that “a new set of values are necessary” for the company to continue considerable growth. He ended his letter proclaiming “This is Day 1.”

I don’t doubt Mr. Sacks’ commitment or intentions. But is Zenefits really likely to change its core values? Can it transform its culture? The problem, as I see it, is that the company, its values and culture reflects those of Silicon Valley. That is both a blessings and a curse.

They dream big in the Silicon Valley and Zenefits became big–one of the fastest growing enterprises in American business history. The company is funded by an A-List of Silicon Valley heavyweights. As of May 2015 Zenefits became the single largest investment of Andreeson Horowitz, one of the Valley’s most august venture capital firms. Several of its board members are Silicon Valley royalty.

The Valley values speed, innovation and disruption (“worship” might be a better word). While I’ve questioned whether Zenefits’ business model is innovative, the fact remains, the company has quickly shaken up more than one established industry.

However, being of the Silicon Valley also means Zenefits exists in a bubble (not the stock market crashing kind, but the island of unreality variety). For example, none of the executives listed on Zenefits’ site has any background in human resources, payroll or insurance sales. Yet those are what the company does. Outside the Silicon Valley this would raise eyebrows, maybe even create concern. Not there. Of course, they have direct reports with subject matter expertise, but none of the company’s top eight leaders (nine before Mr. Conrad’s departure) does? Looks like a bubble to me.

Mr. Sacks is a Silicon Valley rock star. In a December 2014 Pando’s article reporting Mr. Sacks joining Zenefits as chief operating officer Mr. Conrad was quoted as saying “When you have an opportunity to hire LeBron, you hire LeBron.” And it was an apt analogy. Mr. Sacks is good. Extremely good. He was the first COO of PayPal and founding CEO of Yammer (purchased by Microsoft for $1.2 billion). He knows how to run a company–a Silicon Valley company.

It’s also true that Mr. Sacks has been COO and a board member of Zenefits for a year now. Doesn’t that make him part of the company’s “old” culture? As chief operating officer, did he have at least some responsibility for knowing of Zenefits’ compliance problems? Maybe he did and he raised the alarm internally months ago. Maybe.

And that’s where Zenefits is at the moment, stuck in a vortex of maybes. Maybe it takes an insider to lead the company outside the Silicon Valley bubble. Maybe it takes someone who has seen the company’s failure to understand what can no longer be overlooked or ignored. Maybe Zenefits can both grow and follow rules. Maybe the company can swagger less and execute better.

Maybe. Who knows? Until we it’s clear Zenefits has the willingness and ability and to change, perhaps a bit of skepticism is in order. Maybe.

Zenefits Compliance Problems Cost Them a CEO — and Perhaps Millions

Things happen fast in the start-up world. Earlier today I wrote a LinkedIn post on how Zenefits’ compliance challenges in Washington state could cost the company millions of dollars in lost commissions. While noting that it was only a matter of time before someone at Zenefits lost their job over the situation, I had no idea at the time that Zenefits CEO Parker Conrad would resign today citing the compliance problems.

In a press release cited by VentureBeat.com announcing Mr. Conrad’s departure, Zenefits new CEO (and until now, its COO) David Sacks, declared” I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.” (The entire press release is worth reading).

The loss of a founder and CEO is another cost Zenefits will pay for their alleged failure to comply with states’ insurance laws. I don’t believe they’re done paying for their mistake, however.

What follows is a slightly edited version of my my earlier LinkedIn article I had prepared for posting on this blog tomorrow morning under the title:

A Zenefits Felony Conviction Could Cost Company Millions in Commissions

Washington regulators are investigating Zenefits’ alleged use of unlicensed agents selling insurance policies in the state. This is not only embarrassing for a company as brash and boastful as Zenefits, but the company’s finances could be substantially impacted, too. Not just because, if found guilty of this felony, Zenefits could face a multi-million dollar fine. The far greater risk to Zenefits is the prospect of losing commission income — a lot of it.

William Alden at BuzzFeed News has done a great job pursuing the story of Zenefits’ unlicensed sales. Now Mr. Alden is reporting that, based on public records it seems “83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses ….”

The potential fallout is quite substantial even though only a small number of sales are involved–just 110 policies out of 132 sold or serviced by Zenefits in Washington between November 2013 through August 2015. “Soft dollar” costs include a damaged brand due to the bad press, distractions at all levels of the company, and needing to address whether the company is ignoring other consumer protections.

Then there are the hard costs. 110 policies times the maximum $25,000 per violation Washington can impose means fines of up to $2.75 million. Financial penalties imposed by other states could add to this figure. While paying a $2.75 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As Mr. Alden points out, the fallout from this investigation could result in carriers dumping Zenefits and that could cost the company far more than any criminal fines.

Carriers require agents to meet several requirements before contracting with them and agents must continue to meet these requirements to keep the agreement in-force. Common provisions include being appropriately licensed, maintaining adequate errors and omissions coverage, and not committing felonies or breaching fiduciary responsibilities. Fail to meet any of these requirements and agents can find their contract terminated for cause.

Terminations for cause usually allow insurance companies to withhold future commissions from the agent and, depending on the specific terms of the contract, from the agent’s agency as well. If an agency or agent knows or should have known they were in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions already paid out.

Being found guilty of a felony in Washington state could allow a carrier–any carrier, anywhere in the country–to terminate Zenefits’ agent contract for cause. Rumor has it that only about half of Zenefits’ revenues now come from insurance commissions. Late last year Zenefits CEO Parker Conrad claimed the company was on track to earn $80 million in 2015. So, let’s see, millions times 50% … carry the one … yeah, this hurts. A lot.

A nuclear outcome is highly unlikely. The Washington state investigation into Zenefits is ongoing and Zenefits, to date, has been found guilty of nothing.

Even if Washington regulators find Zenefits committed a felony, for reasons described in a previous post, the outcome is highly unlikely to be a fatal blow to the company. Insurance regulators have considerable leeway in determining fines and penalties. Absent proof that Zenefits knowingly and intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude this situation resulted from incompetence. They might then impose a modest fine on Zenefits and subjected the company to enhanced review of their licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as the result of what started off as a two-bit break-in. That kind of cascading escalation is extremely rare. What we’re seeing unfold in Washington state is probably not Zenefits’ Watergate moment.

Zenefits has already paid a small price for what they’ve allegedly done. I’m guess the whole mess has been a bit distracting to management. And the fact remains: mishandling more than 80% of their sales in a state is a sign of immense ineptitude, arrogance, or both. Having this reality aired publicly is not good for Zenefits’ brand and resources will need to be expended to make sure it doesn’t happen again. I’m not aware the company has fired anyone as a direct result of their lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down their controversial broker comparison pages in which the company used carefully selected criteria to compare themselves to community-based agents. (I guess they were reluctant to add “being investigated for multiple felonies” as one of the comparison points). This is a small sacrifice as the comparison page was likely an attempt to enhance their search engine optimization rather than an effort to take business from their competition.

Zenefits has paid a small price. The open question is, how large a price will the company ultimately pay? For that, it will be well worth following Mr. Alden’s future stories.

 

Zenefits’ Problems Real, Not Fatal

Zenefits has hit a rough patch. Given the insults the company’s CEO, Parker Conrad, has heaped upon brokers, the Schadenfreude percolating through the broker community is understandable. Yet declarations of Zenefits’ demise are premature.

Zenefits raised $500 million in May of this year at a valuation of $4.5 billion. At the time, Parker Conrad, Zenefits’ founder and CEO claimed the company was “on track to hit annual recurring revenue of $100 million by January 2016….” That was then.

Now the Wall Street Journal is reporting that Zenefits is falling short of its earlier revenue projection. According to the Journal and Business Insider, through August Zenefits’ revenues came in at closer to $45 million and the $100 million annual revenue figure is likely out-of-reach. In response, Zenefits is reportedly instituting a hiring freeze and imposing pay cuts. The latter step is cited as a reason at least eight executives left Zenefits.

In light of this news, in August or September Fidelity Investments reduced the value of its Zenefits investment by 48% estimating the company was now worth about $2.34 billion. That’s a seismic event: in May Fidelity thought Zenefits was worth $4.5 million. Just five months later Fidelity thinks this was being a tad optimistic … if by “a tad” we mean “$2.16 billion.”

In an interview with Business Insider, Mr. Conrad admits Zenefits is unlikely to keep his promise of earning $100 million this year. However, he claims Zenefits continues to hire (although not as fast as in the past) and is happy with its revenue growth–“more than $80 million of revenue under contract” (which, it should be noted, is not the same as saying “we’ve taken in $80 million so far this year,” but maybe that’s what he meant). Mr. Conrad also asserts Zenefits is getting “closer and closer” to being cash flow-positive, although he doesn’t expect them to get there until 2017 at the earliest.

Missing his $100 million commitment and having to address the subsequent fallout is no doubt adding to Mr. Conrad’s stress levels. Since Mr. Conrad went out of his way to insult community-based benefit brokers on Zenefits way up, the joy brokers are taking in his discomfort now is to be expected—and is arguably earned.

Should brokers assume Zenefits is no longer a threat, however? No. They are still bringing in tens of millions of dollars in revenue. According to what I’ve heard, only about 60% of this revenue comes from commissions. An ever-increasing portion of their revenue flows from fees earned by selling third-party services or their own non-commissioned services. Zenefits launched their own payroll service today so their non-commission revenue will continue to climb. Zenefits may not be worth $4.5 billion any more, but it is still valued at over $2 billion. And while no CEO is happy when a serious investor marks down his company by nearly 50%, Mr. Conrad says Zenefits won’t be out raising money anytime soon. As a practical matter, the impact of the devaluation on Zenefits is minimal.

In short, Zenefits is sticking around.

But I predict Zenefits is in for a rough time. Direct competitors like Namely and Gusto are raising money and stepping up. Community-based brokers are increasingly leveraging technology. Full disclosure: I’m co-founder of the company launching NextAgency, software that will help brokers level the playing field against Zenefits, so I’m delighted to point out this trend.

While new initiatives like their payroll offering will create new revenue streams, they also carry significant risk. Current partners will view Zenefits as a potential competitor. Management will be distracted from the company’s core business. New skills and expertise need to be acquired. There’s something to be said for focus and Zenefits may be losing theirs.

Schadenfreude is German for deriving pleasure from the misfortunes of others. That Zenefits’ current problems generates this impulse in the brokers they’ve insulted should surprise no one. That Zenefits will face challenges, problems and set-backs moving forward is inevitable. That community-based brokers should continue to take the threat Zenefits represents is seriously is wise.

Clients Pull, Zenefits Pushes Benefit Brokers to Adopt Tech

“The question is not if benefit agencies will go digital. The question is when. The answer … 2016.”

That’s how I began my technology talk at the California Association of Health Underwriters’ TechSummit on September 29th in Universal City. Several in attendance  asked for the presentation. Since the slides are mostly key words and graphs, I thought sharing the content here over a couple of posts would be more helpful.

I’ve been engaged in sales technology since the 1980’s (yes, Millennials, we had technology back then). However, the need for successful producers to embrace technology has never been greater. This first post explains why. Tomorrow I’ll offer a checklist brokers can use when selecting technology.

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Consumers Pull, Competitors Push

Going digital is inevitable. Customers want it. Competitors make it necessary.

Customers are increasingly running their businesses with technology. They use digital tools to keep their teams informed and aligned, preserve and transfer documents, reach customers and track sales. Even traditionally low-tech companies—plumbers, barbers, dry cleaners—use technology to schedule appointments, process payments, track invoices and speed work flows.

Or consider this: in 2013, nearly half of Staples sales were over the Internet. This makes Staples the nation’s third largest online retailer behind Amazon and Apple and ahead of Walmart. The same survey found Office Depot was the ninth largest online retailer. That’s a lot of businesses, both large and small, using technology to buy something as prosaic as office supplies.

Digital activity by clients is creating a gravitational force pulling more-and-more benefit brokers into the tech orbit. After all, if your clients are using technology and conducting business online, shouldn’t you?

If customers are pulling brokers to go digital, competitors are pushing them in the same direction. In poker, if you look around the table and don’t see the sucker, you’re the sucker. Similarly, if you’re not using technology to grow your business, someone else is using technology to take your business.

Zenefits and Others Push Brokers Toward Tech

Exhibit A: Zenefits—the Donald Trump of benefit brokers. Like Mr. Trump, Zenefits can behave like a rich, arrogant bully. Yet, either because of or in spite of this character flaw, Mr. Trump and Zenefits have shaken up their worlds and highlighted weaknesses in established players.

Like Mr. Trump, Zenefits’ strategy seems to embrace trash talking competitors. Zenefits CEO Parker Conrad has promised that “If you’re an insurance broker, we’re going to drink your milkshake.” (At minute 1:30 of the linked-to video). He claims competing brokers “barely know how to use email.” (At minute 38 of the video). Mr. Conrad’s prognostication concerning today’s professional benefit brokers? “All of the existing brokers today are all f**ked.”  OK, even Mr. Trump doesn’t drop the f-bomb on his opponents in public, but that’s most likely just a generational difference in styles.

Some brokers complain that Zenefits is using its riches (the company has raised over $500 million dollars in capital) to post arguably misleading comparisons between itself and specific independent brokers—a tactic Mr. Trump might applaud. As I’ve written before, even though I find the comparisons unfair, this isn’t a new marketing tactic nor outside the norm in America.

Yet, for all his bombast and bullying, Mr. Trump has forced other Republican presidential candidates to step up their game (a task at which many are failing). They may not like him, but his opponents need to adapt to his presence. Zenefits and similar companies like Namely and Gusto are forcing brokers to adapt to new realities. In this new world, simply delivering value is no longer enough. Clients now need to perceive that value.

It’s Perceived Value that Matters

Benefit brokers have long provided considerable value to their clients. They shop the market and find the right solution for clients’ unique needs. They answer questions and resolve problems. They provide informed, personalized, professional counseling and advocacy on behalf of their clients before and after the sale. Simply put: they earn their commissions.

Yet, for too long, too many brokers have been hesitant to highlight their value. In fact, they often undermine how clients perceive their worth by claiming their services are free. This is both inaccurate (health insurance premiums include brokers’ commissions) and diminishing (consumers tend to undervalue what they don’t pay for).

Zenefits takes advantage of brokers’ modesty. They offer businesses free HR and benefit administration software in exchange for being named the employers’ broker-of-record. That’s an attractive deal when the software has perceived value and the services of the incumbent broker is hidden.

Technology can help put brokers’ value on display by providing greater insight into what brokers deliver. Increased transparency can lead to greater perceived value.

Significantly, Zenefits’ leadership knows this. When asked about the company’s competitors, Sam Blond, head of sales at Zenefits, claimed they had none. He grudgingly acknowledged that professional brokers could fill that role, but “what you get with a traditional health insurance broker is no technology.(At about 28:30 in the video).

Zenefits and new firms like them have seized on this digital gap to tilt the playing field in their favor. When your competitor points a neon arrow at your problem, it’s smart to pay attention. Many brokers are and that’s what’s pushing them toward increased use of technology.

Successful Brokers Leverage Tech

Competition from well-funded technology firms has never been greater, but there’s nothing new about the role technology plays in helping brokers get ahead. My book, Trailblazed: Proven Paths to Sales Success, grew out of a study of 200 health insurance brokers in six states. The study sought to identify what practices, processes and perspectives fast-growing sales professionals shared that their less successful colleagues did not.

Among our findings was that high-growth producers were significantly more likely to incorporate technology into their business than the others. They were more likely to use technology across a broader range of functions, too. Brokers whose business was declining were the least likely to have incorporated technology into their practice.

When I led individual and small group sales at WellPoint (now Anthem) I championed the 1999 launch of AgentConnect, which enabled our agents to sell individual coverage online through their own websites. While competitors (think PacifiCare) were trying to displace brokers using the Internet, we used it to empower brokers. The result: WellPoint increased our market share while hundreds (and eventually thousands) of independent agents launched online sales initiatives. Many of them ranked among WellPoint’s top producers.

WellPoint’s AgentConnect launched 16 years ago, but was not the first sales technology adopted by successful benefit brokers. I was helping program the quoting system for Multiple Services (the small group general agency my father, Sam Katz, founded in Los Angeles) in 1983. And there were digital sales tools available before then.

Not If, When

Technology has been a part of the employee benefit world for a very long time. The increased pull of clients and push of competitors just makes the need to leverage tech tools more pressing ever before. As noted at the start of this post, the question is when will brokers will go digital. I believe the answer is early next year.

Many brokers have already adopted innovative technologies. The majority, however, have not and now face a dilemma. Do they deploy new digital tools—or ask their clients to deploy new technology—in the middle of open enrollments, ACA calculations and the host of other time-consuming, business-threatening challenges all happening between now and the end of the year? Or, do they wait until 2016 to leverage the tools available to them?

I have a stake in the answer (as disclosed, below), but even if I didn’t, I’d bet most brokers will fight their way through the rest of 2015 with the tools they have before transforming their agencies with new technologies.

Being thoughtful about the technology you embrace is important, because the decision is critical. Not only are you entrusting your livelihood to the technology, you’re entrusting your reputation and your clients’ well-being to the platform you choose. Adopting technology costs more than money, there’s a host of hidden expenses as well. I’ll discuss these and other factors, as well as offer a checklist to help you evaluate your technology options, in tomorrow’s post.

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Full Disclosure: I’m a co-founder and CEO of Take 44, Inc., a technology company which, in early 2016, will launch NextAgency. The NextAgency platform will integrate quoting, CRM and enrollment tools to help brokers sell more with powerful HR and benefit administration tools they can give to clients for free. This is in pursuit of our mission: to help benefit brokers level the playing field against high-tech disruptors like Zenefits while spotlighting their high-touch value.