Wheel of Fortune

For a moment, slip on the shoes of a CEO of a small to midsize company. It doesn’t matter whether they’re wingtips, statement pumps or handcrafted Italian leather boots. The point is this: you’re about to walk a mile.

As CEO, you’ve been working with a brokerage to handle benefits for your employees. But the Affordable Care Act and increased regulations have complicated the picture, entwining benefits with numerous other aspects of the overall business. You’ve heard about that free software that will allow you to manage all your HR from an easy-to-use platform—including insurance and payroll. And now there’s a call from the company that’s been handling your payroll services, noting that since they already have the data for employee hirings, terminations and much else in between, they would be well positioned to start handling benefits, too. You process all this while trying to run your business, keep your employees happy and engage your increasingly demanding customers.

Need a chance to catch your breath?

Some in the benefits industry call it cross-channelization. Others, an encroaching threat. Still others consider it a bounty of opportunity for those willing to roll with the shifting landscape. Regardless, the time for sitting back and waiting for a return to normal—when brokerages and payroll companies had more clearly defined roles—has long passed. That’s especially the case for those whose clients run small and midsize companies.

“These small and medium-sized companies want somebody who understands the complicated world of HR and benefits compliance better than they do, someone who can give them the shorter version so they can do the right things,” says Laura Kerekes, chief knowledge officer for human resources solutions provider ThinkHR. “They also want someone who can give them advice on being best in class as it relates to managing their people. Most business leaders today have multiple management challenges daily and rely on their trusted advisors for support.”

A handful of years ago, before the ACA, ThinkHR had “a healthy business working with brokers and payroll companies and their clients, giving advice and answering maybe 100 questions a day,” she says. “Today, that’s up to about 350 each day, and about a third of them are benefits related. Our brokers and payroll partners are recognizing the need to refine the goods and services they offer for customers who are more sophisticated and looking for more comprehensive management solutions from their trusted benefits broker advisors or payroll consultants.”

Easily enough said, perhaps, but how is it done? Brokers have questions about strategy all their own: Should I consolidate? Partner? Expand? Specialize? And is there value or risk in letting things shake out first?

“The biggest problem for most agents and brokers in times of permanent change is that there are no clear street signs,” says Michael Turpin, executive vice president for health and employee benefits at USI Insurance Services. “The local broker agent often does not sense that climate change is imminent until catastrophe hits their largest clients in the form of competition—or, worse, lost for cause business. An agency may feel their current direction is correct, and then overnight find themselves in dire straits. By the time you realize you don’t have all of the resources you need, a large percentage of your highest-margin business—typically the largest and longest-tenured customers—are at risk. When the rate of change outside your business is exceeding the rate of change within, you’re in deep trouble.”

Small Business Model

Ask virtually anyone in today’s benefits landscape about change, and a consistent theme emerges. It’s not just that change is happening; it’s that change continues to happen at a faster pace.

Take tech benefits start-up Zenefits, for example. Launched in May 2013, Zenefits already counts more than 10,000 companies in 48 states as customers, and collectively they have more than 100,000 employees. In addition, these small to midsize businesses are no longer primarily tech companies based in California. More than half of them are outside that sector, representing professional service firms, nonprofits, schools, stores, a steel mill “and even a circus,” says Zenefits CEO Parker Conrad.

The idea took shape while Conrad was at his previous company, performing most of the HR functions himself.

“It was never a lot of time,” he says, “but it was time that I deeply resented.”  

Zenefits, Conrad says, took aim at doing something “very unsexy but very important: automating HR and freeing entrepreneurs and small businesses from all the administrative and compliance headaches that come with actually having employees. Until now, these solutions were only for the biggest companies. By figuring out a way to make running a company effortless and give it to small and medium-sized businesses for free, Zenefits is revolutionizing how small business operates.”

Rather than just getting rid of HR paperwork, Conrad says, Zenefits gets rid of the work itself through HR automation. Tasks that used to take weeks—checking compliance boxes, onboarding new hires, enrolling in insurance—are now instant and automatic. And in addition to being free, he says, there are neither contracts nor “disruptive switching of HR systems.”

Not everyone believes Zenefits will sustain its current rate of growth. Some question whether the company will be able to provide the depth of specialized intelligence clients need—despite the brokers on staff. Some accuse the company of violating rebate rules. Others have responded by offering their own tech platforms, particularly to assist with private exchanges.

And then there are payroll companies like Paychex and ADP. In recent years, their own natural progression has been to keep introducing value-added services for clients. Insurance arms of the business have been around for quite a while, starting with workers comp. More recently, however, technology and access to data have enabled new frontiers. Kevin Hill, vice president for insurance and HR solutions services at Paychex, says when it comes to the complexities of the ACA, private exchanges, changes in enrollment and compliance, “fewer agents and brokers are now able to meet the rising level of expectation from clients.”

Several years ago, Paychex aspired to handle virtually any employee-related function that companies would outsource—including the increasingly complicated tasks related to insurance.

“We had an affinity relationship with this large payroll base. We could call on them because they were already Paychex clients, displace their existing agent and broker, and then be a good agent,” Hill says. The transition has caused company growth to accelerate in a way that can’t be matched by those without the same client base or resources to make investments, he says. In coming days, Hill says, he expects to see increased consolidation among these brokers—as well as an ongoing increase in the pace of innovation.

“It’s a changing market,” he says. “The commissions generated for agents and brokers on group health insurance are still very attractive. And for that reason, many people want the privilege of doing that business with the clients out there. If you’re lazy, you’ll lose. And if you’re innovative, you’ll gain. The innovators are gaining, whether it’s us or Zenefits or someone with a different model and higher value.”

Speaking of different models, there’s also Maxwell Health, another technology-based offering. The operating system for employee benefits is considered a “health as a service platform,” and the company not only works with insurance brokers, carriers and professional employer organizations, but also integrates with companies such as ADP to incorporate benefit deduction information.

“We didn’t get up one day with the idea of making benefits administration better,” says Maxwell Health co-founder and CEO Veer Gidwaney. “It’s much more than that. Our purpose is to fix healthcare in America. And the way we do that is by totally changing the experience around how people value and engage with their benefits every day. Buying benefits is hard. Using them is an order of magnitude more complex.”

Regardless of who’s offering the technology, no platform can be assumed to take the place of human expertise. Today’s marketplace, Gidwaney said, demands both.

“Technology should be an enabler, not the replacement of,” he says. “I come from the particular perspective that it doesn’t really matter which specialization you have. The idea that you can offer benefits-related services without a core technology platform won’t be possible anymore.”

So is the answer for embattled brokers found simply in creating new technology? 

The Next Phase

Jennifer Walsh, a senior vice president and national employee benefits business leader at Woodruff-Sawyer & Co., doesn’t believe so. “It’s really about making life simple for the client,” Walsh says. “There are lots of competing platforms out there. Woodruff-Sawyer is not going to become a software company, just like we’re not going to become an insurance company. It’s our job to understand the market, have pre-negotiated deals, so clients can get preferred pricing. I don’t really view all this as an opportunity, because every finalist meeting I’ve been in, there’s a question about what our capabilities are. It’s not as much of a differentiator, but rather we need to demonstrate that we have subject matter expertise in technology solutions that will meet our clients’ needs.”

Walsh says she simply doesn’t have time for conspiracy theories about companies like payroll giants Paychex or ADP—or, for that matter, Zenefits—aiming to wipe out brokers.

“I think you watch it, but it’s like watching any of my competitors in the market,” Walsh says. “There are certain advantages and disadvantages that come with scale, with what their market reputation is for service. Over time, our clients will decide, do I want the ‘all-eggs-in-one-basket’? How easy is it to unplug or disconnect certain pieces? I think what clients, consumers, want today is flexibility. The era of ‘assign us as your broker and we’ll do all of these things for free’ is quickly going away.”

Instead, Walsh says, firms like hers have taken on the role of a general contractor.

“We’re keeping everybody connected, tracking on projects and ensuring a favorable outcome for our clients,” she says. “We’re now saying to teams, we need to know what our clients’ payroll system is and what their HRIS system is and what their benefits administration system is, because those could be three different vendors that they work with. When we’re hired, we expect that, from time to time, we’re going to need to help with a technology vendor change or facilitate discussions with vendors and carriers to resolve problems. It means talking with clients who are contracted with these vendors. We rely on the client in terms of how deeply involved they want us to be.”

She says having compliance resources is the new price of admission to be seriously considered a broker consultant, whether 10 or 10,000 employees are involved. “Or provide help with employee communications. Or wellness,” Walsh says. “And now we provide consulting around client technology solutions as part of the mix.

We just think of it as the new normal.”

Pete Gruenberg, chief operating officer at Digital Insurance, also has seen his company “evolve,” establishing new partnerships in benefits administration and making investments in client-facing technology solutions.

“Many brokers learned the business as an underwriter, a sales rep, an account manager, focusing more on the consulting or transacting part of the business,” Gruenberg says. “And now they find themselves squarely in the middle of what may have been somebody else’s domain.”

Progressive companies started getting into this space earlier, he says, “but now everyone is having to consider the new needs and issues of employers in different ways. It expands the traditional boundaries of the broker role to provide both advisory services and technology solutions.”

Turpin, meanwhile, sees a particular opportunity for national brokerages that have never been credited as being at the same caliber as large consulting firms, because they may be able to offer numerous exchange options rather than just one.

“Employers right now are concerned these consultants and advisors they’ve trusted for so many years are endorsing their own exchanges and feeling pressure to cross-sell owned facilities to meet shareholder expectations for membership,” he says. “The big consulting houses have always held themselves up as being the most non-partisan advisors. But many clients are now realizing that the person I’ve always looked to for objective advice now has a massive economic incentive to sell me their exchange and administrative support systems. And these professional benefits service buyers are not stupid. They’re saying, ‘I need to find an advisor who I know will be sitting on my side of the table.’” 

The Carrier

At the center of all of this, naturally, is the insurance. Bob Neil, national practice leader for specialty markets at The Guardian Life Insurance Company of America, considers what’s going on all around him as positive. “It’s good for the market, good for the customer, and good for the consumer,” Neil says.

Guardian’s perspective, he says, is still to recognize the broker as both customer and partner.

“We also recognize the change in the distribution landscape,” he says. “There are a lot of things that are affecting not just our brokers, but their clients and their client’s employees. What we feel we need to do as a carrier is adapt to those changes and be more diverse in our distribution. That’s not saying we’re moving away from brokers as customers. It’s recognizing that the broker is evolving, and we want to evolve with them as they redefine their business model. What we try to do is evaluate these potential partners to determine if we can align with them, if it fits into our strategy, and if it fits into theirs.”

Those who are nimble and comfortable with change will capitalize on opportunities, he says, “and that’s a wide-open deal. I’ve been in this business a long time and have never witnessed as much change as has occurred in the last three or four years. From a personal perspective, you have to look at it from, ‘Can I change? Do I have to change? Do I want to change?’ I sometimes see people who aren’t willing to change, and I think, ‘Why not? What’s the risk?’”

In the end, what will be most important is whether these changes will allow carriers to enhance the value of their products and services regardless of the title, agency or role of the person who helped deliver it.