Zenefits – A Unique Business Model + Innovative Operating Model
Zenefits is a new HR software system. Free to the customer, with an operating model that allows for sustainable product innovation and customer value creation.
Zenefits is an online software-as-a-service (SAAS) business founded in 2013, by entrepreneurs with two laptops and a dream. Today the business has nearly 2,000 employees, $85mm of annualized recurring revenue and a valuation of $4.9bn. It’s core service offering is online human resources management that aims to automate and outsource all of the major administrative tasks of the human resources function of small and medium sized businesses. Some of the more notable products include payroll, insurance benefits, timesheet management, employment verification, employee onboarding and compliance. Today it serves nearly 200,000 employees across more than 40,000 businesses nationwide. It’s core service audience is the CEO, CFO or CHRO of a small to medium sized enterprise.
Zenefits has a very unique business model. Zenefits does not charge any fees to its customers directly for its service (for the most part). Instead it makes its money (about $450 per employee, per year) by serving as the broker of record (insurance broker) on any insurance that is bought through Zenefits. Prior to Zenefits, companies bought insurance through local insurance brokers that provided nothing more than free tickets to local sports games in return for the business. The insurance brokers get paid between 2% and 10% in commissions from the insurance carriers (think Aetna, Prudential, etc). Rather than provide you a couple of free tickets to a local game and a warm birthday phone call, Zenefits aims to provide its entire suite of services in return for the privelage of being named the broker of record (insurance broker) for the health insurance that a customer secures through the platform. The underlying premium paid by the customer, quality and terms of the policy and carriers are the exact same. In this model the value of the product to the customer is very high, while the perceived cost of the product is free.
From an operating model perspective, Zenefits distinguishes itself by utilizing two strategic design paradigms. One is product development through a “hub and spoke” model. They begin with the obvious (payroll, benefits) then try and offer an automated solution for every conceivable service that utilizes the same dataset. Once you enter an onboarding information at time of hire, they find ways to use that data to accomplish other tasks. Why should you have to enter SSN or DOB in a separate payroll onboarding form? Why should you have to print an ID badge by keying in employee name and date of hire? Zenefits takes in data once, then auto-fills and auto-populates that data to all ancillary services that it can help set up. By doing this, it creates immense value in the form of time saved for a customer and creates a “pull” for usage. While the brick and mortar human attempts to find a seat to a coveted baseball game to offer you for being a valued customer – at the same price and at the same time – Zenefits is constantly finding new “spokes” of HR related services it can offer you. This aspect of the operating model enforces, validates and embellishes the quality of the business model.
Another unique and highly strategic design paradigm within the operating model of Zenefits is that “Zenefits runs on Zenefits”. Many innovative companies must always ask themselves “what product should we offer next?”, “what are the pain points of using our product”, “how can we anticipate the customer experience of a proposed new product?”. Zenefits is able to answer these questions by simply running its own business on Zenefits. In fact, it is the largest company that utilizes the Zenefits suite of solutions. It is also able to anticipate design and usage challenges, see implementation hiccups live and explore new and tangential service/product opportunities by running its own business as an experiment in design and product testing. This is a truly unique element of the business.
By further ingraining itself with customers (by offering more and more services, with higher quality and reduced implementation hiccups – all of which is a by-product of the aforementioned aspects of its operating model), Zenefits is able to create an ever more effective business model. The product engagement created by more users switching from brick and morter management of HR and Benefits creates more and more opportunities to become the “broker of record” on an increasing amount of insurance being sold on its platform. I think this is a highly effective example of business and operating models working in tandem to create a sustainable and competitive edge.
Zenefits turns the traditional HR model on its head. The most interesting part about Zenefits to me is the value capture: Zenefits has slipped into the industry without anyone feeling like they are paying for the product, yet Zenefits makes $450/employee/year. The customer has never paid for insurance brokerage services (they did not pay insurance brokers) and they are still receiving it for free with Zenefits. Customers are actually getting incredible amounts of value on top of brokerage service – entire HR functions from onboarding to training to ID badge printing – is done for free. The insurance companies have alway paid brokerage fees, so they do not perceive any change in cost as they pay Zenefits the same 2-10% they pay other listed brokers. The person who loses – who is “paying” for this innovation – is the traditional insurance broker who has now become obsolete. I wonder if there will be backlash from this kind of disruption to the industry, or if insurance brokers will always have a job with companies who want to keep an in-house HR team and in-person contact from their insurance brokers.
Zenefits is another great example of how shared economy is disrupting the traditional business segments. I would like to learn is how sustainable is the insurance brokerage fees it receives from the insurance company? Is it a one-time brokerage fee they receive per employee when they are on-boarded or is it a recurring revenue? Also, is there any other revenue source apart from insurance which Zenefits earns? Model of they themselves becoming users for their products is very efficient and intuitive from a product management perspective.
I doubt how this is sustainable. It might look as an interesting feature to outsource your HR however going forward the more complex the world gets the more it needs to internalize its operations for various reasons such as security and control.
Zenefits is an awesome model. I think some of the more interesting long-run opportunities come not from the value capture model (charging the broker rather than the consuming company) but rather the way the company creates value relative to HR outsourcing companies like ADP. Zenefits (and indeed other HR tech companies like JustWorks and Namely) have really broken new ground by building great software product. It’s roughly as intuitive to use as turbo tax and employees can actually perform a lot of the enrollment and onboarding work themselves–it’s self-service. This reduces the need for a big internal HR group or relying on an HR outsourcing firm like ADP. Additionally, the employee has a much better experience, much higher satisfaction with their benefits, than when they experience them through an ADP-like service.
I think that while Zenefits has used their value-capture model to penetrate the market and get to scale, it’s likely to evolve to a more traditional model as the current brokerage model that dominates HR benefits begins to be dis-intermediated.
Great post. I think Zenefits is a great company, but think we should temper expectations a bit. As you said, it’s business model is centered on the hub and spoke model, which means they must own the central employee record and utilize it for the various functions you mentioned. The question I have in terms of the operating strategy is around scope. Should Zenefits own all the functions (particularly payroll as well as compliance, timesheet, etc.) or work with partners? If they work with partners, I believe a significant portion of the value created is owned by the partners (specifically ADP). Choosing to do it themselves means a massive investment in product development as well as dealing with competitive response by the incumbents in these various categories.
Secondly, I question the scalability of this operating model, at least in the context of it being characterized as a pure SaaS company that is completely technology enabled. Zenefits is taking on an SMB insurance brokerage industry in the US that represents about 500K employees. Certainly, Zenefits’ software is more scalable than the mom and pop insurance brokerages, but to imagine a tech company taking on this industry at dramatically lower headcount is unreasonable. Zenefits currently has a 1:100 ratio in terms of headcount to covered employees, which is not much different than the status quo ratio (roughly 45-50M people work for small to medium enterprises in the US). Of course, Zenefits will not scale linearly from here in terms of headcount, but you are asking for some immense efficiency in order to consider this a pure SaaS business.
Overall I think the company is still great, but on a more modest path.
First all, i think the inventor of your user name is a genius. This business model is very interesting to me, as it seems to create big value to SMB companies with zero cost. However I’m curious about
1)how could Zenefits differentiate themselves from other competitors with similar services, or potential entrant, as it seems to me the entry barrier is quite low given the core products are simple tasks such as ID card printing and payroll management?
2)is there local engagement required to scale up the business? i would assume SMB are scattered all over the states, and am curious how would the customer service and customer acquisition work geographically