Zenefits Has Its Icarus Moment

You can find the original post on Linkedin

The news is out and everyone is now reacting to the departure of Parker Conrad, former CEO of Zenefits.

For such a high-flying company, literally one of the fastest growing enterprise SaaS companies in history, they finally ran afoul of regulators and compliance - showing that a mix of playing fast and loose with the rules does not go down well in a highly regulated industry like insurance.

Arguably, in a less-regulated corner of the internet, this type of “anything goes” culture would have served them well. But Zenefits had their Icarus moment, flew too close to the sun and got burned.

As a data-driven technology company in the benefits space, what lessons should we take from this? Positive and negative ones to be sure.

First, let’s give Zenefits credit where credit is due.

• They showed the benefits industry was ripe for disruption by proving the weakness of the traditional broker model.
  Many brokers, post-ACA, didn’t (and still don’t) add much value and charge obscenely high commissions.
• They built a product that solved one of the biggest pain points for small and early-stage companies.
  Businesses were buried up to their eyeballs in paperwork. Employee on and off-boarding were a major pain point. Zenefits’ software solved this pain point.
• Their solution was “free”.
  By taking out the rich revenue stream of the insurance broker, which was embedded in the premium, they were able to bypass the dreaded “pricing negotiations” which drastically shortened their sales cycle.

Where did they go wrong?

• They sacrificed quality for sales.
  The sales-driven culture at Zenefits measured their success purely in terms of sales goals. It takes time to scale an enterprise company where customer success matters. Even when it became obvious that other parts of the company could not keep up, nothing could stand in the way of their sales machine. This is where raising half a billion and the pressure to live up to a $4.5B valuation can come back to haunt a young company.
• They hired support without domain experience.
  To scale a business, it takes more than sales. It takes a commitment to deliver on your promises. When it comes to managing corporate benefits programs, it takes years of experience to run the gauntlet that is the American health insurance system. No one wants to rely on an account manager who is fresh out of college and has less experience with benefits than they do.
• They got careless.
  Zenefits’ laissez-faire culture ultimately went too far. In their haste for growth, they forgot they were in a highly regulated industry. This resulted in letting unlicensed salespeople sell insurance. Ultimately, this brash style, which some labeled ‘disruptive’, came back to to bite them.

Lumity’s take
The lesson I take from this that we’ve applied at Lumity is that running a successful technology company in the benefits industry is most effective when disruption is not wielded like a blunt force instrument.

• Technology can disrupt
  Technology and automation have helped us realize significant cost efficiencies, which benefits consulting firms cannot compete with. Our insights help Finance and HR understand what their benefits ROI is, what their expected health care costs are going to be, and how to strategically design benefits programs to meet the specific needs of employees. In a manual fee-for-service world, this kind of solution was inaccessible to all but the largest companies.
• Service cannot be disrupted
  What we are not disrupting is service. Brokers and benefits consultants for years have made service a hallmark of their brand. Service is not about solving on-and-off boarding. It’s about supporting them throughout the year when they have issues like claims disputes. Most fundamentally, it’s about making sure they have the right coverage. That is service.
• Growth for growth’s sake is short-sighted
  In their haste to scale, raise huge rounds and break SaaS sales records, Zenefits forgot that the goal is not growth for growth’s sake. It is in fact to serve and delight your customer. If you can do that, growth will come. The day you focus on your own goals and not your customers, you are doomed. At Lumity, we are growing fast and following the rules at the same time. However, our number one goal is to always deliver value to our customers and grow our business by helping them grow theirs.

This is not an industry where the “externalities” of failing to deliver for customers are inconsequential. It’s not “uber-for dry cleaning” where the worst result you get is one star on your app. Insurance is regulated for a reason. Employers and employees have real needs around healthcare and insurance that impacts their lives. It’s our responsibility to take our mission seriously and help fulfill these needs with a level of commitment that goes beyond looking at the numbers.