Stake in the Ground

Tell us about the business strategy around this partnership.

Many folks have kind of lost sight of the fact that we actually started our entire company in the outsource business. There are hundreds of broker partners that outsource business to us of different sizes, so we built an entire infrastructure in teams and virtual-based employees.

Our outsourced business is a substantial business, and it just got substantially larger. So purely from a business standpoint, this is a major influx of revenue and a major bump to profitability for our company, because there are a lot of cases that we’re going to begin managing—more than 7,000 cases—so it’s a big engagement. That’s first and foremost.

I think that the second thing really is…we’ve just come to the realization that we don’t deploy technology at scale, and we needed to figure out how to do that more broadly because we think it’s what our clients need. This is a big step in the direction of alignment around going to market and deploying technology in a much more integrated way but doing it with a partner that has technology resources and an overall scale.

So you’re doing two things. You’re going to use the Zenefits platform because it scales for new business and maybe for some of your current business. But you’re also taking over 7,000 cases for Zenefits and managing them?

Yes, they’re going to cease to be a broker. And they’re going to align with brokers now. They’re going to do it with what they call Certified Brokers. So this isn’t going to be a situation where all brokers can now go sign up with Zenefits. They’re looking for strategic alignment with firms with scale because they’re not looking for 1,000 brokers who want to put it in two cases and play defense. They’re looking for partners that can process the technology. And they’re starting with us.

But they’re also going to sell it to your competitors. You’re the first of many brokers.

So the question is how many brokers do they end up working with? My speculation is it’s going to be a smaller number of big brokers.

But I think it’s going to be interesting how other brokers ultimately deploy this technology, because it is heavy lifting when it comes to trying to roll out technology to a broad swath of your clients. For example, we’ve spent weeks down in their Arizona operation. We took an operations team into their operation center and looked at it and said, “What work do they do, and what work do we do?”

What’s been very interesting is that we’ve both been trying to be a broker for like 25, 75, 150 life groups, but the work that’s being done is very different. It’s not like a straight outsource deal where we’re saying, “Oh well, you don’t need those people because we do that.” It’s a different type of work that’s being done. We’re opening up an office that’s in the same office building as their operation center down there. There are Zenefits people that are going to become OneDigital employees, and we’re going to integrate teams so that we can do this more efficiently. We’re having to re-create positions, job titles, that kind of thing, to deliver on this. Whoever ultimately decides they’re going to play offense with Zenefits’ technology is going to have to operationalize that. What I feel good about is I think we’re going to be a great combined solution, a differentiated solution for small and midsize employers. Whoever else can accomplish that, have at it.

What is it about the broker role that has been difficult for groups like Zenefits to replace?

It’s very difficult to be a broker for groups that span across a bunch of different segments and geographies. So, if Zenefits had said a long time ago, we’re going to deliver software and we’re going to be a broker in California, they probably would have been more successful at it. They probably would have had people on the ground to support their centralized software solution. But I think what most firms find out, whether it be payroll companies, whether it be tech companies, whether it be financial services organizations, is they’re trying to manage business in a centralized way.

Honestly, it’s what we did 17 years ago when we started the company. We developed a call center and we said, “Hey, out of Atlanta, let’s try to manage business for the whole country.” You don’t know product portfolios…everything is so geographically driven, state-based regulatory driven, and the nuance of networks and products and compliance and everything to do with what brokers in markets know day in and day out because they’re immersed in that particular geography. You try to do that out of a call center in Arizona—or quite frankly what we tried to do out of a call center 17 years ago in Atlanta—and you pretend. You do it as best you can, but you don’t know what you don’t know.

What we have learned is there’s sort of a pivot point. Under 20 lives you can pretty much do remotely. Over 20 lives, you have to be face to face with clients. It seems to be the way things break out, and so we built an entire organization over and under that pivot point.

Zenefits is known for making the small business profitable. Everyone struggles with that. How scalable is this?

It has more to do with the complexity of a company’s benefits program than it does the size of the benefits program. So, for instance, we could use Zenefits technology at OneDigital. We’re 1,000 employees today [but] we’re relatively straightforward: all employees get the same benefits program. We’re not a complex benefits environment. So it’s not necessarily about the number of employees; it’s about the overall complexity of the benefits offering that you’re building.

I think their view is, downstream, they’re going to be much more of a middle-market solution.

The other key piece of it is how to very profitably manage small business. To get this right and to deploy technology into tens of thousands of groups, you have to do work more efficiently than is done today. We’ve been chopping away at that for 15 years. If you look at OneDigital today—and the number of groups where we deploy technology—we have benefits admin technology somewhere in about 5% of our overall groups. Maybe it’s 10%, but it’s probably not more than 10%. How are we going to take that to 50, 70, 80% of our groups? How are we going to manage 100 million millennials coming into the workforce by 2020? We better figure out how to do technology. I think brokers that don’t think they’re going to have to be responsible for that or don’t think that this is coming in a more meaningful way, it really is.

This isn’t about benefits administration. This is about software that runs an entire business. There’s an entire ecosystem. If we can find our way on this path that they’re going down and they can leverage the advisory business that we’re building out, which is substantial, if I was a client, [I’d be] saying, “Wow, I have a team of technology folks and benefits folks and HR professionals explain to me how I can manage people more efficiently as an employer? I’ve not really had someone come in and do that.” And trust me, there’s a bunch of solutions in the marketplace that come out and try.

Payroll companies go out and say, here’s a one-stop shop and we do it all. Technology companies are saying the same, but when you look at what really works, they do their core business really well and the other piece of it they don’t do very well. And that’s across the entire industry. The more we looked at that and the more we struggled with it, we just came to the realization that there’s a better way to do this for clients, but you have to be all in. Which means you have to change the way work gets done, you have to change the map of the business, and that’s what this partnership is about. It’s about changing the map of the business going forward so the clients get a different overall solution.

So it’s about managing people and the efficiency of managing people.

That’s exactly right. It’s about managing people. We’ve come to the realization that, for small and midsize businesses, we need to understand how the role of the advisor evolves. And I think that it can be encapsulated the following way—we have to begin to look at not just the employer being our client but employees and families in the group as clients. This is, in our estimation, putting a flag in the ground that says our role as advisor can get reshaped to go through the employer down to the individual and family. That really can only be done long term with technology. A call center can support it, but it has to be a tech-enabled solution.

This is an entry point to basically say the future is going to look different. We want to be part of that future, and we need to do more for our clients long term. And this partnership is an acknowledgement of we don’t think we’re going to do it on our own, but we need someone on the other side who is not just advanced today but has the financial backing from their investors to build and be around for the long term.

What was your process in coming to terms with Zenefits and their history and then figuring out how to work so closely with them in terms of combining employees and culture?

When the first meeting got set, we probably went to it with a level of trepidation about what we were going to walk into. Like the rest of the industry, we read what happened, and we made judgments about what that meant. But what I will tell you is the reason we are doing this partnership is because of the people. No other reason. They’ve got a world-class group of people leading this company now. And the passion that we came across, the attitude, energy and intelligence of the people at Zenefits, who in a very humble way [want to] get this right going forward, is why we’re doing this partnership.