Supercool, SuperSaas, and Going to Jail
The interconnected business ecosystem worlds of venture capital, cloud computing, software as a service (Saas), and Human Capital Management (HCM) were shocked last week when Zenefits – one of the hottest and fastest growing companies on the planet – made an unprecedented business announcements that caused the rocket ship to crash back to earth.
Zenefits built their entire value proposition of human capital management software as a service by being new, hip, focused on cutting red tape, loose with the rules, and a providing a different user experience from established and ethical solution providers like ADP.
Last week, the company announced that founder and Chief Executive Officer, Parker Conrad was leaving the company and is under a criminal investigation for among other things encouraging leaders to falsify claims of employee certifications to sell healthcare and investments. How did this happen and what are the business leadership lessons for established companies who face competition from other start-ups like Zenefits who position themselves as potential industry disruptors like Uber, Airbnb, and others?
The Zenefits Story
Zenefits established a unique value proposition to small business customers by acting as a third party providing HCM solutions such as payroll, benefits, and talent management that is easy to use, has cool and glitzy software, supported by aggressive marketing, creates operational efficiencies, and most importantly reduces costs by cutting out a lot of the bureaucracy from the system. Essentially an operationally efficient business strategy.
And this value proposition worked extremely well. In their first year of business (2013), Zenefits generated revenues of only about $1 million. The following year (2014) revenues rose to over $20 million, and the estimated growth became exponential as investors and analysts saw the organization generate over $100 million in 2015. In addition to the revenue growth, Zenefits also achieved significant profitability and free cash flow. Based in these meteoric results, Zenefits was able to raise more than $500 million in capital and achieved a market cap (enterprise value) of over $4 billion.
In his letter to employees, newly appointed Zenefits CEO David Sacks criticized his predecessor and the entire culture of the company. It turns out that there has been widespread cheating and misrepresentation about compliance and tests taken by employees to become certified as brokers of insurance and healthcare. In addition, there were breakdowns in basic business processes and reports of extremely inappropriate behavior in and out of the office environment. In essence, a business that is regulated and has to have strict compliance to rules, rigorous processes to deliver the value proposition, and the highest level of ethics, had failed to establish a culture of ethics or compliance.
As you step back from it, the culture created in this organization clearly had nothing to do with the business, the expertise of the people, or the value proposition to customers. The only thing that mattered was explosive growth at all costs. As we all know, one person can’t create a dysfunctional organization alone; he was enabled at every step by investors pouring in money expecting a huge returns, a board of directors not asking the tough questions they should have, other executives never pushing back, and managers and employees who should have known better.
In the end, Zenefits may not survive and a lot of good people will lose a lot of money and a lot of good employees will lose their jobs.
So if you are a leader in an established company, with strong compliance practices and a strong ethical culture, what are the lessons from the Zenefits story? How can they position versus these new competitors?
If it’s too good to be true, it probably is…
If or when you start losing business to a value proposition that seems too good and too easy, step back from it and ask your customers to think about it.
- Where did this company come from?
- How are the able to deliver this solution so inexpensively?
- Can they illustrate to you their compliance and standard operating procedures for implementation?
- Position the value of experience and expertise
There is honor in creating long-term sustainability
It may sound anachronistic in the day in age of the high flying start-ups, but it is important to customers and to the brand that there is an honor in creating a long-term and sustainable business. True long-term economic value is achieved through hard and smart work and doing the right things every day. Not by lying to customers.
An unethical culture eats strategy for lunch
As the stories from former and current employees continue to flow out of Zenefits, it is clear that the unethical behaviors were more than just a few people. Very quickly the culture became uncontrollable and there was never a chance to recover by simply focusing on the business strategy and execution.
This is an interesting story and it’s far from over. There are many lessons to think about and opportunities for established companies to win back some lost business.