A Hot New Small Company HRMS
About 25 years ago, one popular choice for a small company (two to 50 employees) HR system was Abra Cadabra. There were others, of course, but Abra Cadabra triumphed by doing it more simply and now serves millions of customers. Meet San Francisco start-up Zenefits. While many HR applications may run on your smartphone, Zenefits runs like your smartphone, and really offers a consumer-tech experience in business software.
By Bill Kutik
Who else remembers the Abra Cadabra ad that ran in HR magazines for years, featuring a picture of a frazzled office manager/HR lady with pencils sticking out of her hair like Katisha in The Mikado? I can't get it out of my mind.
It was so embarrassing, yet so right at the time. It perfectly captured the frustrations of office managers (many companies still don't hire an HR person until they hit 50 or 100 employees) trying to get all those HR transactions done, as well as the rest of their jobs. And Abra Cadabra was simple: originally a single-user system where you loaded the floppy disks into your PC, set up all the employees and got going.
There were others at the time -- including Steve Perry's HR-1, Ty Tyler's Five Technologies and others who will send me annoyed e-mails for not mentioning them -- but Abra Cadabra thrived and triumphed now with about 3 million small company customers in North America today! At the time, people dismissed it as a "toy."
That handily crushes ADP's small-business-services division with its 450,000 clients under 99 employees (even toss in Major Accounts' 150,000 customers under 999), as well as Paychex, which has even more clients of the smaller size. And those customers don't all use their vendors' HR systems; some just use payroll.
Owner Best Software finally ditched the ad, maybe when it shortened the name to the more business-like Abra or decided to swim upstream with an unsuccessful mid-sized HRMS product called Motiv!, now owned by Kronos.
In any case, Best was acquired by Sage Software, which still sells Abra, now called Sage HRMS, which is incredibly fully featured with strategic functionality -- and still sells to companies mostly with 25 to 500 employees.
Exactly the target market of Zenefits CEO Parker Conrad.
I mention the history because 34-year-old Parker is reliving it, naturally without really knowing anything about it. A classic Silicon Valley serial entrepreneur (though happily without the usual arrogance), Parker is on his second or third start-up in eight years since leaving the corporate world at Amgen, where he used his Harvard chemistry degree as a product manager for three years after school.
Zenefits brings competitive advantages perfect for our times: a new level of connection and collaboration with all the many vendors and carriers HR uses; the complexity of the basic HR transactions (which is all it does right now) either hidden from or truly made easy for the end-user; and the best example of the consumer-tech experience everyone is always talking about in the business-software world. Other systems may work on your phone; Zenefits often works like your phone.
I missed understanding all that at my first demo months ago, when everybody was writing about Zenefits after getting $66.5 million in a second investment round led by venture capital firm Andreesen Horowitz, which unusually led the first round of $15 million as well.
Happily, Steve Boese had the good judgment to select Zenefits for Awesome New Startups for HR at the last HR Technology ® Conference, where I saw it again and the cynic kicked in: "No way can it be that easy. This is HR!" So I chased Conrad down in San Francisco the next week while attending the Dreamforce conference on Oct. 15.
I mention the exact date because Zenefits then had 330 employees. Less than three weeks later, when I saw a long demo, the employee count was 390. Does the word "Topsy" come to mind?
Parker started Zenefits with one purpose in mind: "solving all the little headaches and annoyances that sucked up time for me at my last start-up; I get a perverse pleasure from stamping out each of these problems, one by one, for the next guy."
What that means is that Parker, much like those who founded Workday, started with a clean sheet of paper. And unlike Workday, Zenefits had zero HR domain expertise in-house, just geek co-founder Laks Srini and marketing guy Matthew Epstein, and Parker's own knowledge of what had annoyed him before and zeal for learning.
He also had no experience with enterprise software, only his determination to make it easier for the next entrepreneur. Later, he hired HR experts and even retained famous Wall Street employment law firm Orrick to craft the system's standard documents.
So what have you got? A classic Valley start-up intent on solving the problems of other Valley start-ups with more zeal than knowledge. Jeff Pfeffer, professor at the Stanford B-School (recently joining Fortune as a blogger), once told me, "Silicon Valley is actually only a few dozen big companies with hundreds and hundreds of start-ups functioning as R&D labs hoping to be acquired by one of them."
Occasionally, one gets to grow up. Until March, 95 percent of two-year-old Zenefits' clients were tech companies in the Valley. Since then, 75 percent of its new clients are outside California and outside tech. Selling outside the Valley is like a baby taking its first steps.
Parker understood the key to ease-of-use was electronically connecting all the vendors and carriers HR has to touch (mostly in benefits, thus the name) into one system. Also doing everything possible for the user, which constantly amazes me on smartphone applications, when I often ask, "Why doesn't my laptop do that?"
For health insurance, this is hardly a new idea. Before ADP acquired it, Employease years ago connected all your insurance providers to its HRMS to create the monthly premium bill that miraculously both sides accepted after fighting over for it for three weeks every month. Workday is today doing much the same (and more) with its Employee Spend application.
But Parker took it one step further and made Zenefits a licensed insurance broker in most of the 50 states, apparently quite easily once it was licensed in California. And then he forged electronic connections to 1,500 carriers (health insurance being sold state by state, as you know).
When he started, the insurance carriers wanted him to fill out their paper forms and fax them over, but Zenefits' rapid growth helped bring them around. Or maybe he just kept insisting.
Today, Zenefits has 2,000 clients with 50,000 employees.
So, like many benefits platforms in larger systems, Zenefits will show employees their insurance choices, compare them side-by-side, but then let them take the final step of actually buying them, instead of just sending HR a message about which one they want.
Parker says qualified people are available at Zenefits as benefits advisers to counsel companies on their options and best choices for insurance. And occasionally to help with insurance company disputes. Just like a broker.
And the yearly 5 percent commission Zenefits gets on health insurance premiums (just like a broker) plus the larger 10-percent to 15-percent commission on dental and vision coverage, is recurring annual revenue. This allows Parker to offer the software to everyone for free!
Jerome Ternyck had a similar idea with SmartRecruiters, but the partner services he was selling (such as background checking) do not throw off the kind of money insurance premiums do. With the national market for brokers selling health insurance estimated at $18 billion, you do the math. Five percent of the premium means about $200 to $400 per year for each employee or family at each client.
Parker has been moving Zenefits slowly upstream. In 2013, he talked about two-to-99-employee companies being his sweet spot, with two to 50 being even sweeter. Now, near the end of 2014, he claims it's up to 500, but that may be aspirational given his 25-employee customer average. He estimates there are 6 million U.S. companies with up to 500 employees, which still leaves plenty of prospects not using Sage, ADP or Paychex.
Parker became an autodidact on the American healthcare system after recovering from a serious illness and reportedly read every page of the Affordable Care Act. He insists Zenefits is 100 percent compliant with ACA now and in the future, and I'll take his word.
If new customers already have an insurance broker - and most companies do because premium prices are the same with or without one - switching to Zenefits is dead easy: The user fills out three fields - carrier name, state, policy number - signs it with the mouse and Zenefits generates all the paperwork to change. Once a Zenefits customer, changing carriers is similarly easy; just add the renewal date.
Zenefits does not offer payroll, but has done brute-force integration with the most popular payroll providers. Some, like Intuit, cooperate because they want the new business (and don't sell a competing HRMS), and yes, Zenefits gets a cut of that, too.
If a new client already has a payroll provider, setting up employees in the Zenefits system looks like a cinch. Entering the proper credentials brings a download of the payroll account into Zenefits, which does most of the work setting them up in the HRMS.
While all that may be cool, I find what Parker has done with COBRA especially astounding because of its simplicity! COBRA is the first function HR outsources, not wanting to become an accounts receivable and processing department for monthly medical-insurance-premium checks from former employees. Sending them reminders when they're late, cutting them off for non-payment.
With so many employees now getting their salaries through direct deposit -- usually an automated clearinghouse transfer directly into their bank account -- it's a simple matter of permission to make that bi-directional, allowing the company to dip into a former employee's bank account and grab the monthly COBRA premium!
Exactly like the consumer experience of paying your electric bill through direct access to your credit card or checking account.
Please, tell me if any company uses a system that does this already. Should I not be astounded at how ingenious -- and so obvious, once you've heard it -- a solution this is to the COBRA problem? Plus the 2 percent cut.
The benefit list goes on - life and disability, flexible-spending accounts, health-spending accounts, 401(k), commuter benefits - all are set up with similar ease, once the proper bank accounts are established for them. It must have been a deliberate design decision, but as the server does its work setting up employees, you watch a bar changing color that looks just like your smartphone downloading an app!
Now, let's get real. I've been calling Zenefits an HRMS for a reason, because it's just barely that and certainly not an HCM. At the moment, it is a bare-bones transactional system with not a strategic function in it. The tabs for employee activities are the basics: Hire, Contractors (no VMS, and contingents are kept separate from employees), PTO, Stock Options (of course, it's the Valley!), Time & Attendance and Reports.
It only meets the needs of small organizations with the simplest HR processes. Just like Abra Cadabra did 25 years ago. It has an enormously long way to go before becoming an HCM. But Parker is truly doing it differently, has a road map that is pointing him in the right direction and an awful lot of money. So I'm betting on him.
HR Technology Columnist Bill Kutik is co-chair emeritus of the 18th Annual HR Technology ® Conference & Exposition, returning to Las Vegas, Oct. 18-21, 2015. You can comment on this column at the Conference LinkedIn Group, which doesn't require prior or future conference attendance to join. Listen to The Bill Kutik Radio Show ® for his provocative interviews with HR thought-leaders. He can be reached at firstname.lastname@example.org.