Will Zenefits CEO’s resignation open the door to bigger moves for the company?

Ten months into his tenure as CEO of Zenefits, David Sacks has confirmed rumors that he is stepping down from the position. Sacks explained the move in an email to employees, saying he plans to become company chairman and lead the search for a new CEO.

“The chairman role will allow me to focus on what I do best — product and strategy — while working with a great operator who can help build our small business pipeline,” Sacks said in the company email.

Sacks' announcement caps off a turbulent year for Zenefits, which started with founder Parker Conrad resigning as CEO when it came to light that the company had an internal software program to circumvent producer licensing requirements. Sacks, then chief operating officer, took over — promising to take the company in a new direction.

Zenefits directed a request for comment to Sacks' company email.

Over the course of the year, Zenefits laid off hundreds of employees and dealt with a slew of regulatory investigations. In his Dec. 2 company memo, Sacks said Zenefits has settled issues with 20 states, including Washington, which last week announced the company must charge clients for software in its state.

Referencing Washington’s decision, Sacks said in his company email, “Far from being a setback, the Washington deal provides an answer on the rebating question for a handful of states, helping to resolve all of the existential issues that faced the company just a year ago.”

In fact, Sacks used much of the email to tout Zenefits’ successes under his tenue, including resetting company “values, culture, mission, leadership and governance.” This summer, Zenefits released a licensing app to ensure constant producer compliance. The app is now available for any producer to download in the Salesforce app store. It also launched a new line of product offerings under the umbrella Z2, in October.

Future moves
Technology consultant Joe Markland predicts even bigger moves for Zenefits in the future. “I am guessing sooner than later Zenefits will be absorbed by a larger organization that has a stronger and better brand in the market,” says Markland, president of HR Technology Advisors.

Markland adds he would not be surprised if a company like Fidelity, which is already a Zenefits investor, were to acquire the firm to strengthen its small-group business. “Between the chaos within Zenefits and more competitors entering the market, I think something bigger needs to happen,” he says.

However, Zenefits would be wise to return to its passion-fueled roots first, says industry consultant Wendy Keneipp.

Sacks mentioned in his Zenefits-wide email that the CEO position “is not a job I sought, but I felt a responsibility to our investors, employees, and customers to help the company through the crisis.” It’s a common process with a company that is started by someone passionate about the product, such as Conrad, to lose sight of its mission going forward when a new leader is more operations-focused, says Keneipp, partner and coach at Q4intelligence. Zenefits is falling into this pattern, she says, and therefore is “at a critical juncture.”

Just as Apple and Starbucks both needed company founders to step back in, Keneipp thinks Zenefits needs someone with passion to drive the company vision forward. But first, she says, they must determine what that vision is. Operating as an HR software company that is funded by brokerage commissions is “Zenefits’ biggest challenge and downfall,” Keneipp says.

“Commissions are intended to fund the brokerage part of the business — identifying the employer needs and helping them implement the policies effectively. Zenefits, however, uses those commissions to fund the development of their software — a hugely different level of expense, expertise and focus for the business. This can’t help but create confusion internally and externally about who they are as an organization. Are they an insurance broker or a software developer?,” she asks.

If they are truly a software company, “then being an insurance broker has got to be hugely distracting for them. I think they need a leader who will really analyze their role and focus them on a single business and do it incredibly well,” Keneipp adds.

As for the possibility of selling to another firm, venture capital investors are going to be expecting positive ROI in a reasonable timeframe, Keneipp says.

“The end game for these software companies and their investors is to build it to either sell or go public so everyone can get their money,” she says. “In the case of Zenefits, they’re not stable enough to go public, so selling is going to become the prize for them. And since they’re valued and described as a software company, but their revenue is delivered through insurance brokerage lines, there is a significant disconnect between their revenue and their valuation. They should hope that someone comes along and buys them while all of this confusion is still at play about what type of company they really are.”