There are two things Parker Conrad knows to be true when it comes to his peers in the employee benefit brokering business: One, they don’t like his company. Two, they don’t know what Zenefits does. The co-founder and CEO of the San Francisco-based tech startup-turned brokerage has been known to make some inflammatory remarks about the profession —“these guys don’t do very much” and “all of the existing brokers today are all [expletive],” as he’s told national consumer media outlets — but Conrad believes the reason for the dislike comes down to simple economics. “Zenefits is viewed by other brokers as a profoundly evil company because we’ve stolen a lot of business from folks. I get it. I get that that’s painful. I hate losing clients myself,” he says. But, he adds, such detractors have “no idea what we do,” having never seen the product or understood its value proposition, he says.

The Zenefits flagship product is a human resources information system that does benefits, payroll, on and off-boarding, retirement, paid time off tracking, commuter benefits and more. Conrad acknowledges many see it as “just some tech thing.”

“But,” he says, “one of the things that I really believe is that Zenefits will be extremely good for this industry and extremely good for brokers themselves.”

Let him explain.

Technology as customer service

As Conrad sees it, the typical broker today spends “about 90% of their time” dealing with administrative burdens. “I think it will be painful for a lot of agencies if we continue to be successful, but for the actual people in question, the people who want to focus on client service and who want to help people with these difficult decisions, I think what Zenefits lets you do is just that,” he says.

That’s been the experience for Cameron Hyland, who left his family’s firm around nine months ago to join Zenefits. The 37-year-old broker focuses on mostly small-group (under 50 lives) clients in Washington state. “My family’s brokerage, I felt like I was always doing it all. From the day to day employee communication, processing dreaded paperwork to underwriting, submitting new groups,” says Hyland. “I’m really able to just focus on what I’m good at here, which is great. I’m able to work with more clients, do more plan consultation at renewal. Just really advising clients and forming those relationships to make sure they’re comfortable with their health, medical, vision — all of their employee benefits.”

Conrad, who turns 35 in April, says one of the most common misconceptions about Zenefits is that it lacks the ability to be a trusted adviser to clients: “That is sort of a cultural bias that we have around the United States; it’s either technology or its people. If you have technology, that must mean there’s no person behind it. And that’s not the way we look at it.”

He says a Zenefits representative is just as likely to be on the phone with someone facing a middle of the night crisis as any other adviser, but the difference is “they happen a lot less frequently,” he says, citing the fact that Zenefits software intercepts potential problems before they become one. For example, when a client’s employee turns 26 and isn’t on the health plan, they’ll automatically get a notice that they’re about to lose their parent’s coverage and will be given a link to enroll.

“That’s something that we can just do right in our product and it means that people don’t end up without coverage in the first place,” Conrad says. “There are like 50 other examples of stuff like that.”

Sue Wakamoto-Lee has been a broker since the late 1980s and with Zenefits for around 10 months. She wouldn’t have set one foot in the door, however, if she didn’t trust the company was a true benefit brokerage, she says. “It is a tech company that is doing benefits. I wanted to know in my heart that benefits were a priority if they were going to call themselves a benefits broker,” says Wakamoto-Lee. “ … Understanding that my value as a consultant could definitely be used here, that was one of the first things that was a myth-bust for me here. OK, they are really a consulting firm. They are just doing it differently.”

The one exception to the expectation that Zenefits will do anything for a client that a local broker would do is that they almost never do in-person visits, says Conrad. Everything is over the phone and online. Open enrollment meetings consist of video chats. An advantage, Conrad says, because it allows spouses to participate.

When Wakamoto-Lee spoke with EBA she was about to fly to Texas to visit a client, but said such occasions are very rare. “The way our model works, I am much more efficient if I am in the office. I can handle more clients that way,” she says, adding that with clients all over the country, she’s often up at 5 a.m. Pacific time answering questions from East Coast clients.

“You can be a better broker with technology around some of this stuff than doing it by hand and doing it in person,” says Conrad. “Other things, it really is you’re a better broker by having a human being talking to another human being. And in those cases, that’s what we do.”

Don’t expect it to involve a wellness program, however. “Let’s be honest, every study of any wellness program ever, the only time we have found actual scientific evidence that that cuts costs is smoking cessation,” says Conrad. “The rest of that is, like, not real. So we don’t spend a lot of time on wellness programs because we don’t think it’s something that works.”

Zenefits does help self-insured employers look at benefit design and how to improve their plans, he says. For example, if a client is spending a lot on emergency room visits they’ll raise their ER co-pay or publicize the high-quality urgent care coverage and share where those centers are located. “That kind of stuff we do all the time,” says Conrad.

HSA plans, while cost-saving, are often “another pain-in-the-ass system for an employer to deal with,” and Zenefits’ technology takes away that burden as well, he adds.

It’s a burden Conrad knows firsthand from becoming the de facto HR person at his last small business, online financial advisory firm SigFig. “Every time we hired someone at my last company … I’d always help them with their insurance enrollment. I happened to be more knowledgeable than the general public because I’d had cancer a few years earlier, and once you have a serious illness you have to be really vigilant about this stuff,” Conrad says.

Online furniture retailer Anthony Soohoo, co-founder and CEO of Dot&Bo, knows what it feels like to run a growing company and deal with HR hassles along the way. He switched his 80 employees to Zenefits just over a year and a half ago after struggling with a PEO’s platform. “We found them to be kind of clunky. The employees really couldn’t use the tools and in general the employee base satisfaction with that tool was not very high,” says Soohoo. He was looking for a company that could provide “a broader vision with all of HR,” as opposed to just insurance, “and Zenefits fit that bill,” he says, adding that he heard of them through fellow CEOs at other startups.

Zenefits’ ability to quickly add features as Dot&Bo needs them is appealing to Soohoo, who has added more and more capabilities to his Zenefits platform. “We started with insurance, and as we started using and had more trust in the system, the fact is we found it fairly easy for employees to use. We started leveraging more and more services that Zenefits has to offer,” he says. Those services include PTO management and onboarding.

When issues come up, Soohoo says he’ll call or email to report them, usually getting a response that same day. “We use Zenefits the same way we use any other website, like Gmail or something. It just works,” he says. Employees “don’t need instructions, they just kind of figure it out.”

Dot&Bo’s most recent open enrollment involved “a ton of education” and “went as smooth as can be,” Soohoo reports. “When we grow to over 1,000 I think we’ll still be on Zenefits just because it’s easy to use, it’s maintenance-free and it’s intuitive in terms of what we get out [of it]. And we only have to pay for what we use.”

“I feel good about our chances”

Conrad’s decision to serve the small-group market at a time when a lot of firms are shying away from it was a deliberate one. In his initial talks with brokers as he investigated getting into the market a few years ago, Conrad heard a lot of them say they’d get out of small group if commissions went down. “I was thinking, well, gosh, it’s still a really great business in terms of the revenue that it produces. The only reason that it’s so costly to service these clients — or the main reason — is that there’s no technology here,” he recalls of the time.

 

He also found they often had a fatalistic attitude about the market. “‘Obamacare is going to put me out of business,’ ‘Carriers are cutting commissions,’” he recalls people saying. “A lot of times things are not quite as bad as we might initially think.”

Commissions in California, for example, many brokers thought would go from 7% to 4%, but the reality was closer to 6.5%, he explains. “But the other thing that happened is costs went up like 15%, so in dollar terms it’s kind of a wash,” he adds.

Conrad has a reason to pay close attention to commission rates, since they are the main source of revenue in Zenefits’ business model. Commissions will stay high, Conrad predicts, to the extent that brokers have market power with carriers. States dominated by one carrier, like Alabama and Hawaii, don’t have small-group commissions, “but in states where there’s a bunch of different carriers and employers need help and advice navigating these complex decisions around this stuff, then carriers do pay commissions,” he points out. “I tend to not think that that will change.”

However, Kevin Trokey, partner and coach at brokerage consulting firm Q4intelligence, says commission loss should be a concern. “I absolutely believe that there’s going to continue to be commission compression. There’s going to be more carriers going to that model where they take it out and leave it up to the broker to negotiate it back,” he says. “I think any business that leaves themselves vulnerable to somebody else determining their value … that’s a scary place to be.”

But, rather than worry, Conrad is thinking bigger. “If it does change, what I expect happens is that maybe this market ends up being smaller,” he says. “The revenue per subscriber is lower for brokers, but maybe Zenefits ends up having much, much, much, much larger market share — because the technology that we have will allow us to operate in that sort of different model. That’s not where we are today, but if the industry does move in that direction I feel good about our chances.”

Meanwhile, Zenefits has a “great” relationship with carriers, Conrad says. “We’re enrolling hundreds of new groups a month. So there’s a lot of business that we’re sending to carriers and for many carriers we’re the largest source of new business that they have,” he adds.

Zenefits now has more than 10,000 clients with more than 100,000 lives in 47 states. Most clients are in the small group (under 50 lives) category, but “hundreds of clients” have 100 or more employees, some up to 1,000, according to Conrad. Zenefits maintains its “core features” are “absolutely free” to employers, according to it’s website. But, the company is beginning to introduce a $100 per-employee fee when a client chooses a delayed schedule for implementing its core features.

Regardless, Zenefits employees are encouraged to upsell, just like any brokerage. “In addition to core insurance products, the upsell is going to be a lot of other things. It might be commuter benefits, it may be the 401(k), it might be additional life and disability, but it also might be time and attendance software or stock options administration software or tracking your PTO for employees through Zenefits,” says Conrad.

There is one area Conrad doesn’t think they’ll ever enter directly, and that’s payroll. “The reason is that payroll is really complex and there are really high switching costs. We’d much rather just be connected to everyone in that space and be friends with everyone in that space,” he says, adding that one of those partners, Intuit, has told him Zenefits is their largest reseller in North America.

As the company is less than two years old, almost all of Zenefits’ clients have been with the firm for less than a full year. Conrad estimates Zenefits had around 2,000 renewals in Q4 of 2014. As for retention rates, “What we see is we lose about 1% a month,” he says. “So it’s pretty good.”

But, Q4intelligence’s Trokey believes there’s danger in their business model. “Fundamentally, I think when a business depends on a product to serve its needs — and I don’t care whether it’s a technology product or an insurance product — there’s a lot of vulnerabilities built into that model,” he says.

And Zenefits is not alone, Trokey adds. “So many brokers out there, they are focusing on an insurance product, on an insurance need. I think they’re almost as vulnerable as Zenefits is focusing just on one specific client need,” he says. “There are a lot of other technology companies out there that have Zenefits in their crosshairs and they’re developing solutions to go out and compete directly against them.”

Industry impact

Conrad doesn’t seem too concerned. Other industry technology players, such as enrollment firms, “love us,” he says, “because … all these companies that sell technology to brokers, suddenly brokers are interested in buying it from them.”

In fact, he’s got a collection of 15 or so marketing emails from other companies with subject lines such as, “Protect your clients from Zenefits.” “Zenefits is probably the best thing that ever happened to those companies,” Conrad says.

Zywave is one such competitor. More than 3,000 brokers, including 93 of the top 100 firms, work with the Milwaukee, Wis.-based software company and its HRconnection portal, according to CEO Dave O’Brien — a former broker himself.

Although many brokerages have already been improving their technology capabilities, Zenefits has increased that awareness, O’Brien says. “There’s a lot more calls coming into Zywave now.”

Regardless of technology, O’Brien says brokers need to focus on their overall value proposition. For example, Zywave’s 2014 Broker Services Survey that polled 3,000 employers found an HRIS system did not make the list of what they’re looking for from their broker. “It’s neat. It’s a shiny ball. But really what a broker provides is their knowledge, their consulting abilities,” he says. “The broker community, they’re very entrepreneurial, they evolve. … Where I do think this is a wakeup call for brokers is they do have to stop and focus on their value proposition.”

Conrad told attendees at technology conference TechCrunch Disrupt NY’s 2013 show — in a video that is posted on the careers page of the Zenefits website — that recruiting potential clients is not about how Zenefits will save them money, but rather how it will relieve their HR burdens: “The pitch is not actually that you’re going to save money, it’s that all this work you have to do to manage this stuff, to deal with all of this stuff, is going to go away. So the pitch is we’re going to save you time and headaches,” he said.

But, assuming the responsibility to make your clients more successful as your overall mission allows for insurance products, technology, or any other element to be just another arrow in a broker’s quiver, says Trokey. “You’re not going to have to depend on the carrier’s commission as a way to generate revenue. People will pay checks to people who make them more successful. You’re not going to have to worry about being edged out by someone else bringing in a new bright and shiny product.”

Company culture

Speaking of bright and shiny, take a look at the Zenefits website and you’ll notice right away another factor that makes it different from traditional brokerages: Young faces — a lot of them. But don’t think that means they don’t know what they’re doing, Conrad says. “I think there is a misconception, particularly in the broker community, particularly on this issue, that Zenefits is a bunch of young people who don’t know what they’re doing and don’t have any experience in the insurance industry,” he says. “That might describe me. But it would not describe the team as a whole. There are a lot of people now in the company who have pretty deep experience in the insurance industry, who have 30 years’ experience working for agencies, working for big firms, are trainers at NAHU, these are people who know their s***.”

Conrad is proud, however, that the culture at Zenefits is “very different” from a traditional firm. He touts the company’s open floor plan and the fact that he sits at the same type of desk as everyone else, in the middle of everyone else. “No one has a corner office — no one has an office,” he says.

For 50-year-old Wakamoto-Lee, seeing all the young people in the office when she walked in for her first interview was a concern at the time. Now, she calls them “the smartest people I’ve ever worked with in my entire career.”

Many of Zenefits’ younger employees are programing experts, while on the benefits consulting side the average career span is 10 years, Wakamoto-Lee says. “We’re probably the oldest average age team here at Zenefits,” she adds with a laugh. “You can’t teach knowledge. Knowledge happens with experience. … So just by that we’re the oldest people in the company.”

Hyland loves the laid-back, suit-free environment. “It’s definitely got that startup feel. It’s really neat here. I never thought an employee benefits brokerage could be like this, but it is,” he says. “It’s exciting and fun and we’re bringing on more people all the time, so we’re constantly growing. We have snacks in the kitchen and a nice, cool environment here in San Francisco.”

Zenefits touts its “epic snacks” as a job perk, but of course there is more than food to keep brokers happy. Conrad notes that the company is making as many innovations in its approach to sales and marketing as it is in technology. One of those is that none of their producers prospect. A dedicated marketing team brings folks in the door. Producers “come in every day with three meetings with prospective clients on your calendar,” he says.

Another innovation that is particularly appealing to Wakamoto-Lee is what’s missing from Zenefits: paper. “There’s a little over 200 of us in my office and we have one desktop printer. That’s it,” she says. “For me, that was refreshing.”

Because everything is stored securely in the cloud, “I’m able to work from anywhere,” Wakamoto-Lee says. “I used to lug one of those wheeled carts around with a bunch of files. I’m a 50-year-old woman carrying a backpack now with my laptop in it and that’s all I have to have with me to get my work done.”

A traditional agency producer will close around $150,000 in net new commission revenue to a firm each year, Conrad says, but Zenefits reps have a quota of $1.3 million a year. “We have one rep this month who’s going to close about $400,000 of net new commission revenue just this month,” he says.

It’s fun to be in an environment that is growing and expanding and where things are happening, says Q4intelligence’s Trokey. “Absolutely agencies need to recapture that. So many of them are flat-lined, they’re falling backward, they’re playing Chicken Little,” he says. But plenty of other firms are feeling the joy of success as well. “We’ve got agencies we talk to on a daily basis who had their best year ever last year. … When you’re consistently writing new business, that’s a fun place to be.”

Growth aside, one thing Wakamoto-Lee really appreciates about Zenefits is, well, being appreciated. “It is nice to be in a place where it’s understood that our experience counts for something. I like the fact that I’m respected. I’m really respected and so are my colleagues for the amount of knowledge we have,” she says. “It’s actually made me younger to be here in my character sense just because I used to be bored and I’m not bored anymore.

“It’s wonderful to know that even at this point in my career ... I can still be in a career that I enjoy and that I don’t dread and that I have fun doing and that I am actually having a part in changing the way the industry views what it’s been doing for decades. The decades I’ve been in the industry have been the same. The biggest invention was the fax machine for a while there. Now, for Zenefits to come in and completely disrupt the industry, and I get to be a part of that? It’s awesome.”

A few good brokers

Conrad wants as many other experienced brokers to be a part of it as possible, too. “It’s not our goal to recruit young people. It’s our goal to recruit good people,” he says. “In fact, in a lot of cases we’re really trying very hard to recruit people who have a ton of experience.”

Doing so is “incredibly challenging,” however, Conrad says. One reason is their investment in the current system. “If you have a book that you’ve built up over 15 years and you’re sitting on half a million dollars in your income, you’re not really interested in leaving that and coming to join Zenefits,” he says.

He’s thought about acquiring firms, but to do so would mean more than a redirected phone line and a new name on the door. “We actually have to convince people to implement and use our software, which is a much bigger change for them. Hopefully, it’s a positive change and a lot of them might be excited about it, but you still need to convince them,” he says. “ … We’d actually have to go through a sales process with each and every client if we were to buy a book of business in a way that a more traditional broker wouldn’t have to.”

Then there’s the fact that Zenefits doesn’t need to. “Frankly, right now we can acquire customers for sales and marketing costs that correspond to about six months’ worth of revenue,” Conrad says. “Most brokers, if they’re selling their book, they want about three years’ worth of revenue to buy the book. So it’s basically easier for us to sell the client direct than it is for us to buy it from the broker, or less expensive.”

People who haven’t yet built up a book of business, “those folks are much more inclined to join us,” he adds.

For Wakamoto-Lee, it was a tough decision to join Zenefits at first, since she knew the company was disrupting the market from the broker’s position. But the chance to join a tech startup doing benefits — something she’d never seen before — was a once-in-a-lifetime opportunity she didn’t want to pass up. “I realized that a company like Zenefits would actually value the experience that I have. And, I consider myself pretty youthful and vibrant and I thought this would be a great opportunity to get out of the rut I was in with a traditional brokerage,” she says.

It’s not surprising to Zywave’s O’Brien that advisers would want more “glitz and glamour” in their lives — “Guess what? So do the HR people,” he points out. “It’s exciting and new and different, and if you want to attract new talent you need to have things like that.”

Most job opening descriptions on the Zenefits website start with this statement: “Zenefits is a tech company, but what we do ultimately affects people’s health, not to mention their wallets. We need someone who cares about the problems and concerns of each and every one of our clients’ employees. We also seek someone who is excited to innovate an archaic industry, while thoroughly enjoying happy hours, office pets, and witty banter.”

It’s a tone that undoubtedly appeals to the millennial generation, and Conrad says one of his goals is to take on training new advisers. Zenefits is starting an associate benefits adviser training program for spring 2015 graduates called Broker University at its new Scottsdale, Ariz., facility. Zenefits will pay for participants’ insurance licensing fees and, “teach you how to master all things benefits-related including (but certainly not limited to) how to manage new accounts, assist with renewals and open enrollments, and advise clients on the benefits that they offer their employees as their trusted expert,” according to the company’s associate benefits adviser job listing.

“One of the ironies in terms of our reception by the broker community is that on the one hand … one of the things that people often bemoan is that nobody trains anyone in this industry anymore. It’s the same group of people that were around 20 years ago that are aging out of the business,” he says. “On the flip side, a lot of brokers will throw in our face, ‘Oh, Zenefits, it’s all these, like, young people who don’t have decades of experience in the industry.’ So … first of all, we are trying very hard to hire lots of folks who have a tremendous amount of experience. We’re bringing on a lot of those men and women. But, we also are hiring a lot of people earlier in their carriers and training them up on the business. We’re doing both things at once.”

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