Illustration by Anna Jo Beck
Amy Evans knew things were not good at Zenefits months before news broke about problems at the high-profile cloud-based human resources tech startup.
Evans became an indirect Zenefits customer in 2015 when her husband’s Los Angeles area information technology consulting firm signed on with the industry-disrupting benefits and human resources management platform. Evans, a longtime benefits broker and adviser, said she welcomed the chance to go through open enrollment to learn more about Zenefits, which shook up the insurance industry by offering a free cloud-based human resources management platform to small and midsize businesses that agreed to use it as their benefits broker.
According to Evans, there were problems from the start.
Zenefits offered multiple plans, but the vendor’s website lacked sufficient information for employees to do side-by-side comparisons, she explained. There were no in-person benefits orientations and customer service was poor. On top of that, inaccurate rate information was posted on the site. As a result, Evans and her husband miscalculated the amount they needed to deduct from his paycheck for the portion of their medical insurance he paid, an error they had to correct retroactively, she related in a Workforce interview as well as in a much-commented-on post on LinkedIn titled “Why Zenefits Scares Me (It’s Not What You Think).”
“It was a disaster,” said Evans, founder of consulting firm Colibri Insurance Services in Sherman Oaks, California. “It was worse than I could have imagined it could be from a user perspective.”
Problems at Zenefits exposed earlier this year might be the most eye-opening example of what cloud-based HR tech vendors shouldn’t do, but it’s not the only one. HR professionals share tales of cloud-based payroll providers that botch payroll, account managers at HR tech companies who mismanage accounts and customer service agents who don’t serve their customers.
In the era of big data, cloud-based HR tech can solve a lot of problems for a lot of companies — chief among them eliminating the need for hardware and staff to maintain on-premise software. More companies are switching to cloud-based services for a variety of HR functions. Last year marked the first time more than half of core human resources management systems purchased were cloud-based, according to the Sierra-Cedar Inc.’s 2015-16 HR Systems Survey. Virtually all talent management software now in use is cloud-based (96 percent), along with more than half of HRMS (57 percent), 46 percent of workforce management and 41 percent of payroll, according to the survey.
When cloud-based HR tech vendors run aground because of bad management, money troubles or other missteps, their problems become their customers’ problems. HR departments might have to limp along with a system that doesn’t perform as intended or eat the cost of a bad investment and start over with a different vendor. At worst they could end up with a plethora of employee data trapped in a system that doesn’t work and with no way to retrieve it.
Low Barriers to Entry
Part of the reason cloud-based HR tech suppliers run into trouble could be how low barriers to entry have dropped for startups looking to get into the business. Companies selling software-as-a-service, another name for cloud-based software, can operate on as little as a few thousand dollars a month. In a post titled “The Unbelievably Low Cost of Running a Software as a Service Business” on Medium’s “The Flux” tech blog, the co-founder of cloud-based scheduling software-maker ZoomShift said his two-person company spends about $2,450 a month, not including “payroll or coffee.”
Zenefits fueled the frenzy by raising close to $600 million in venture capital funding from Silicon Valley and financial services giants, including a $512.6 million Series C round in April 2015. Venture firms continue to pour money into cloud-based HR tech at near record levels. They’re betting those tech companies can revolutionize people management the same way similar cloud-based services have transformed many other aspects of running a business. In the first quarter of this year, investors committed $591 million to 106 HR tech companies, an amount surpassed only by the $1.1 billion invested in the second quarter of 2015, which included the Zenefits funding, according to industry analyst CB Insights.
Startups scaling quickly to grab market share have to make tough choices about how to spend limited resources, which can at times force executives to cut back on product rollouts or cut corners on service.
That said, the problems Evans experienced with Zenefits were by no means unique. The startup’s golden days ended earlier this year after customers complained about fumbled benefits and customer service, and revenue fell short of projected milestones. Fidelity Investments subsequently downgraded the value of its interest in the business amid allegations — which Zenefits later admitted to — that its brokers lacked proper credentials and were using illegal computer programs to stay logged into the online courses they needed to get them. Zenefits Founder Parker Conrad resigned and Chief Operating Officer David Sacks took over. Soon after, Sacks cut staff and tamped down what had been a raucous workplace culture, including admonitions to employees to stop having sex in office stairwells. Zenefits’ troubles have seen the private company’s valuation drop by more than half to $2 billion from $4.5 billion. That said, the company still qualifies as a “unicorn,” a pre-initial public offering startup valued at more than $1 billion.
Michelle Simmonds signed on with Zenefits in 2014 while running HR for a previous employer. The startup ran at a frenetic pace that Simmonds said made her apprehensive as her first open-enrollment season with the vendor approached. “I could feel it in response times and how the left hand didn’t know what the right hand was doing,” said Simmonds, a 10-year HR management professional based in Los Angeles. Despite her fears, enrollment went off without a hitch. She said her former employer still uses the service and has nothing but great things to say about it.
Zenefits officials admit mistakes, but claim the company was acting to rectify problems even before Sacks took over as CEO. Last summer, around the time Evans wrote her blog post, Zenefits introduced a tool that made comparing plan benefits easier, which was one of her gripes. Concurrent with Sacks moving into the top leadership position, Zenefits redirected some of its engineering manpower away from developing new features and toward fixing software glitches, which Zenefits large-group benefits adviser Bud Bowlin admits were “fairly prevalent.” Between the fourth quarter of 2015 and July 2016, the company-nicknamed “war on errors” resulted in an 80 percent drop in software problems during onboarding new customers and other operations, according to Kevin Young, a Zenefits spokesperson.
Also as of July, Zenefits had beefed up the licensed brokers on its staff to 250 despite job cuts in other areas. Earlier in the year, the company developed an internal licensing control application that blocks a customer account from being assigned to an employee without a broker’s license in the correct state, software the company plans to give away later this year. In late July, Zenefits reached an agreement with Tennessee regulators over its sales practices; investigations are continuing in several other states.
Young claims customers stuck with them through rocky times, though he declined to share specifics. “We haven’t seen a large percentage of customers leaving,” he said. “In fact, our customer base has held steady and is returning to growth now.”
Sasha Poljak knows what can go wrong at HR tech companies because he’s been there. The longtime entrepreneur became CEO of Nimble Software Systems Inc. in 2014. In the early stages of building out its cloud-based employee shift scheduling platform, Nimble Software had promised to develop modules for a couple of prospective customers’ very niche industry segment. After Poljak came onboard, he made the tough decision to delay that development and spend the company’s limited resources elsewhere. The change effectively killed the platform’s usefulness for the potential customers, who had been testing a beta version of the platform. They left. The prospects incurred opportunity costs and deferred making other decisions, but otherwise weren’t out any money. Still, “It was a very uncomfortable situation,” Poljak said.
Startup tech vendors often must pick their battles so as to better compete in the long run. Unfortunately, Poljak said, customers or prospective customers can wind up as casualties. To guard against that, he recommends companies proceed with caution when teaming up with startups. “Have a plan so you’re not risking all your operations at once on a small vendor,” he said. “Test their capabilities over a prolonged period before fully committing.” (See sidebar, “Be a Smarter HR Tech Shopper.”)
Startups aren’t the only HR tech vendors that stumble. George Weiner, founder and CEO at Whole Whale, a digital marketing agency for nonprofits, was so infuriated by the fumbled services he got from a national payroll processer that he fired them. Weiner signed up with a cloud-based payroll provider last year specifically because he wanted a well-known, professional payroll system for his staff of six full-time and six part-time employees. “I didn’t want someone who was going to go out of business,” he said. “I figured if they were this big, they must be doing something right.”
But problems with the provider, which he declined to name on the record, started almost immediately. The user interface was dated and required logging into different interfaces for different purposes. “I’d get an email alert saying I was getting a notification, and I had to log into a different notification system from the main system” to see it, Weiner said. Whole Whale used the vendor for payroll, workers’ compensation and 401(k) retirement saving accounts. Because of system notifications Weiner claims he didn’t see, he was three months late filing workers’ compensation payments, an oversight that could have cost him $3,000 in local government fines had he not been able to negotiate it down to $500. A third-party vendor the payroll provider used for the 401(k) piece of its platform misallocated profit sharing funds based on erroneous W-2 wage information the payroll vendor provided. “I was dumbfounded how they couldn’t get the right numbers,” he said.
On top of that, Weiner dealt with three separate account managers in nine months. “I was too small a fish for them to care about,” he said. He pulled the plug in the first quarter, shopped around and ended up picking a relative startup. “They were younger and hungrier and cared about my business,” he said. The new system was slightly more expensive but had an updated, clean user interface, and covered part-time workers along with full-time employees. “In my mind, the difference was negligible, especially after knowing what happens when you go after” the cheapest solution, he said.
A Bad Experience Doesn’t Mean the Concept is Faulty
Cloud-based HR tech vendors like Zenefits wouldn’t be growing as quickly as they are if they weren’t tapping into unmet needs. Zenefits whetted companies’ appetite for easy-to-use software that manages benefits, employee records and payroll from a single database, said Michael Wolff, president of Dickerson Employee Benefits, a Los Angeles wholesale insurance broker.
Because of Zenefits, Wolff said the independent insurance agents Dickerson Employee Benefits works with are asking him to help them identify cloud-based benefits platforms they can recommend to their own customers, preferably something else that includes free HR management software or another incentive. To that end, Wolff and his staff spent time earlier this year researching a dozen HR tech vendors to put together a package of cloud-based services.
Wolff cautions HR professionals not to use problems like the kind Zenefits encountered as an excuse to avoid moving to the cloud. It’s still early days, and some hiccups along the way are to be expected. “In my opinion, if it’s running on your virtual desktop or managed by Amazon or another big server farm, it’s a side issue,” he said. “The real issue is: Are you allowing the [technology] to help you manage this data. The answer is: You have to.”
Michelle V. Rafter is a Workforce contributing editor. Comment below or email email@example.com.