Brokers Heading Down the Wrong Technology Path

A few people have said I write too much about Zenefits but in fact, I have been writing about the Zenefits model since 2009 and talking about it since 2002, well before Zenefits even existed. You can see my article on this blog titled, “Payroll Firms, PEO’s and BPO’s, Have Got it Right”. (See article here: https://joemarkland.wordpress.com/past-articles/) I have also conducted numerous webinars on the topic that can be seen on my website here: http://www.hrtadvisors.com/AboutUs/HRTWebinars.aspx . Over the last few months I have seen many brokers contract with some technology vendor to develop their Zenefits-like solution and based on what I am seeing I think most are getting it wrong. They aren’t really developing a competitive or sustainable business model. In fact their solution may be creating a false sense of security leaving their firms vulnerable to the competition.

This past week I spent significant time with a good friend of mine that is a benefits broker discussing the benefits business and this Zenefits phenomenon. He is probably the one broker who I think has truly changed his business model to compete in this new benefits world where technology and outsourced services have become a big differentiator. He still has much work to do but he gets it. With all the noise in the market and new technology vendors popping up everywhere promising to help brokers beat Zenefits we tried to separate the new noise from what we thought the employer market is really looking for when it comes to HR type technology. We had no agenda because we both want to make sure we build a sustainable business. Lying to ourselves would not do us any good. What we concluded was that what most brokers are doing to compete with Zenefits is most likely wrong. The emerging broker models of partnering with some HR and Benefits only vendor (without payroll) is most likely not sustainable and many of the technology vendors will not make it. Here is why.

HR and Benefit Systems without Payroll have a short future.

At my company we have been consulting employers around these solutions for years and we definitely see employers moving to a single system for HR, Benefits, and Payroll. In fact, very few vendors even exist anymore without payroll. There are exceptions but it is a shrinking market. That is until Zenefits came along, but we don’t think Zenefits really is a technology play. I cover that in my webinars. And we believe that even Zenefits will build, merge with, buy, or be bought by a payroll company. Not because they want to but because they will have to. The only employers that will want HR and Benefits systems without payroll will have fewer than 30 employees so maybe Zenefits can survive there without payroll. Trying to integrate a HR and Benefits system with another payroll system is a problem employers would prefer to avoid. Even Zenefits is struggling with this and it probably consumes their resources. Yet most of the new vendors marketing to brokers have HR and Benefits without payroll. Do you know why? It is easy relative to payroll. Understanding and marketing HR and Benefits systems without payroll is also easier for most brokers. What we see is that it is primarily benefits brokers marketing these types of solutions. The rest of the market including HR Consultants, HRIS Consultants, PEO’s and BPO’s are not. Also, almost every HR-Benefits vendor is adding payroll and almost every payroll vendor is adding HR and Benefits. Look around and see how many third-parties are selling just HR and Benefits systems other than brokers. Hardly any. That is for a reason.

Selling or “giving away” someone else’s products does not change your business or build an asset.

If the benefits world changes and revenue for small group insurance gets cut significantly then the revenue from the other products and services that firms like Zenefits provides will need to come into the broker’s organization and not the third-party vendors coffers. The company that provides the value will be the one receiving the revenue. So selling someone else products does not build your asset. It builds the other vendors asset. Brokers selling other peoples products are essentially giving away future revenues that may be needed to sustain their business if commissions gets cut.

Brokers are getting a false sense of security.

If you are a broker that sells or gives-away HR and Benefits systems without payroll your client is still vulnerable to takeover. First, every payroll company in America will still be calling on that employer with a complete solution (with Payroll). Other brokers, like my friend, will be providing solutions with payroll too. Employers will get tired of having two systems and will always be looking out for a better solution. They will take the prospect calls. So, for most of the employer market, HR and Benefit systems without payroll will more than likely be seen as a band-aid until they move to a better solution. And if it is free from a broker or Zenefits then it is not a bad band-aid but it is still a band-aid. I guess if it is free it can be considered a trinket.

Most brokers prefer to keep an arm’s-length between them and HR-Benefits-Payroll solutions.

I wrote an article on this too. (Link here: https://joemarkland.wordpress.com/2015/03/04/an-arms-length-may-be-the-distance-between-winning-and-losing/.) My major point with this really comes back to “selling someone else’s stuff”. If you want to be arm’s-length then you don’t own it. If you don’t own it you won’t get the majority of the revenue from providing the product or service. My broker friend was asked if one of his clients could be used as a reference for another broker who was looking to get into this business. The inquiring broker was looking to see what the client thought of the technology my friend was selling. The problem is the client would not talk about the technology but actually talk about how great the broker’s service is. You see, the employer’s payroll questions come into my friend’s office, not some third-party. His service is anything but arm’s-length. He owns it and he gets paid to deliver the solution while other brokers give things away. Another broker I know delivering a complete solution just landed a client with a fee of $70 PEPM.

Most of these points I have made over the past months or even years. This has not prevented brokers from making what I think is the wrong decision. I believe the reason is because the path most brokers have taken is easy. And as the old saying goes, “if it were easy then everyone would do it”. And everyone has. Selling someone else’s HR and Benefits system is easy but does not solve the employer’s bigger problems. I actually had one broker who put in a payroll system through me once say “Joe, Zenefits says they make it easy and this was not easy”. I had to laugh and I told him that Zenefits says they make it easy for the employer, not for Zenefits. For Zenefits it is tough. That broker proceeded to move to an “easier” solution for him, and promptly lost a prospect to another brokerage firm offering a full-blown HR-Benefits-Payroll solution. He didn’t know why he lost but I know because I was working with the winning broker.

Changing your business and competing in this new benefits world is not going to be easy. You will need to move out of your comfort zone. The good thing is that there are so many resisting change that when you do start doing the tough stuff you will find the blue oceans with less competition and more profits. And you deserve it.