Zenefits v. ADP – Round 1

Well, I guess a Benefits Administration brawl was bound to happen sooner or later – ADP Sues Zenefits for Defamation

As an insurance broker/technology nerd who has spent the last 23 years in the trenches of HR, Benefits and Payroll struggles, I hate to say that my first reaction to this was to chuckle a bit.  I am very sorry to all of the effected small businesses who are caught in the middle of this data management fight.  But, you had to see this coming.

Zenefits came onto the scene about 2 years ago and instantly caught my eye.  The software they built was nothing earth shattering – compared to others that had been in the space for years. But, they had packaged it up and were selling it very well.  It was what I had been talking about for years – technology to support the administration swirling around HR, Benefits and Payroll. Their platform was and is very clean and intuitive, and it is flexible enough to accommodate lots of common plans and most small business structures.

It has been fascinating to watch their journey.  They have become a sales machine – using every form of direct marketing available to reach the small business customer.  Their sale to small businesses is basically free software in exchange for becoming the company’s insurance agent (which can be effective for the small employer that is not getting much from his existing agent).  But, their biggest sales by far were to their investors (Ashton Kucher and Jared Leto among them):

It is a good thing the company has raised this kind of money.  Because they will need it to fight the fights they have picked. Payroll companies, HR Outsourcing firms, Retirement Plan Providers, Insurance Brokers and Insurance Companies (if they do not already) will all have competing platforms to manage HR data.  All will want their system to be THE trusted system that an employer relies on to manage the data sharing.  And all will likely give their platforms away – just as Zenefits has.

So, where does that leave Zenefits?

I think they will change the landscape of the benefits industry and the expectations of small employers related to the broker relationship for sure.  I think this change will be a change for the better.  But, they will not dominate that market in their current form (which they would need to do to justify this valuation – sorry Ashton and Jared).

The service of coordinating the data/document/information flow between all of these disparate entities will not be automated by a third party because these entities will not allow that – keeping the process of providing that service somewhat manual and NOT SCALE-ABLE.  This is not exactly where a “technology startup” needs to be and, once that becomes clear, their valuations will be adjusted. I hope they mentioned all of this to Ashton and Jared before they cut their checks.

Regardless, this is the most excitement this industry has seen in a LONG time and it looks like it will get even more exciting as the fights continue.  So, stay tuned!

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