A disagreement between ADP\u00ae, one of largest payroll processing companies, and Zenefits\u2122 a self-described startup that recently raised $500 million at a $4.5 billion valuation has now been escalated to the court room. This disagreement centers on the method that Zenefits\u2122 used to gain access to ADP\u00ae\u2019s payroll system without specific authority granted by ADP\u00ae to do so.<\/p>\n
ADP\u00ae says: \u201cOn June 4, we disabled Zenefits access to ADP\u2019s RUN small business solution due to unusual and alarming demand for data from Zenefits far out of proportion to the number of clients who have allowed them access to our system.\u201d[1]<\/p>\n
Zenefits\u2122 has made a very public display of itself on social media outlets accusing ADP\u00ae of acting in bad faith and succumbing to fear, uncertainty, and doubt. In this squabble with ADP\u00ae, Zenefits\u2122 has garnered some high profile endorsements including a couple of A-list celebrities.<\/p>\n
So, you might ask how Zenefits\u2122 got itself in this sticky situation.<\/p>\n
1)\u00a0\u00a0\u00a0\u00a0\u00a0 Their promise of delivering disruptive technology is somewhat misleading<\/strong>. The definition of disruptive technology is one that displaces older technology.[2] But Zenefits\u2122 doesn\u2019t own a payroll platform as a part of its hub-and-spoke business model[3]; its strategy is to leave customers with their existing payroll company such as ADP\u00ae.[4] But payroll is arguably the core hub technology covered by its service designed to administer HR, payroll, and employee benefit plans. Can Zenefits truly claim to be a disruptive technology without control of the core technology underlying its service? Is piggybacking on top of third-party payroll providers without control of the core technology too risky to be viable as a long term strategy?<\/p>\n 2)\u00a0\u00a0\u00a0\u00a0\u00a0 Zenefits\u2122<\/strong> is wanting to eat ADP\u00ae<\/strong>\u2019s lunch and dinner<\/strong> by keeping the higher margin brokerage commissions and leaving ADP\u00ae with the lower margin payroll revenue. There is way more revenue per employee and margin in selling health insurance than in payroll.It\u2019s no secret that payroll companies are looking to brokerage services as an area for future opportunity. ADP\u00ae\u2019s (and Paychex\u00ae\u2019s for that matter) benefits brokerage constitutes almost all of its current growth. Consider the fact that a 4% brokerage commission for a typical employer sponsored health insurance premium of $8k and $24K a year represents $320 to $960 in annual revenue per employee while fee revenue for payroll is just $90 per employee per year. And selling insurance has only a handful of customer service administration events per year while payroll has weekly (or even daily) customer service events per year to manage.<\/p>\n 3)\u00a0\u00a0\u00a0\u00a0\u00a0 When you dance with the gorilla, it is the gorilla who decides when you stop. <\/strong>Zenefits\u2122 needs ADP\u00ae to play nice since ADP\u00ae\u2019s payroll is the core technology to its hub and spoke service model. And ADP\u00ae knows it and is prepared to play hardball. The ADP\u00ae website states: \u201cWe have never integrated with Zenefits\u2122 in any sense and have never authorized their method of extracting data from our RUN payroll system. They gained access to our systems by convincing clients to give them administrative access to our platform. Despite having many legitimate ways to integrate with ADP properly, Zenefits\u2122 chose an unsecure and indirect approach.\u201d[5] ADP\u00ae\u2019s statement is likely vetted by their legal team and therefore sound and given ADP\u00ae\u2019s size as the entrenched incumbent that does not bode well for Zenefits\u2122 getting their way anytime soon.<\/p>\n Our industry\u2014the HR, Payroll and Benefit Administration space\u2014is extremely competitive and technology-driven with complex compliance requirements. It takes a lot of hard work, intelligence, deep understanding of the law and customer service to make it in this business. And it takes lots of effort to convert clients from one Payroll company to another. I know why Zenefits<\/em>\u2122 would want to leave the hard-part\u2014the Payroll part to someone else, but I also know that there are no shortcuts in life. <\/em>To become a disruptive technology leader in our space, I believe that you need to own all of your core technology so you control your users\u2019 experience without the risk of someone or something pulling the rug out from under you and your customers.<\/p>\n So, this move by ADP\u00ae is not surprising at all. ADP\u00ae is simply a business that is protective of its customers\u2019 assets and its future growth opportunity within its client base.<\/p>\n [1] ADP.com. The facts about ADP & Zenefits: Response to the claims made by Zenefits. http:\/\/www.adp.com\/zenefits\/downloads\/The-Facts-About-ADP-and-Zenefits.pdf<\/a><\/p>\n [2] Zenefits has stated that it is a disruptive technology company. Zenefits | Disrupt NY 2013 Startup Battlefield. https:\/\/www.youtube.com\/watch?v=KporpXG0XK8<\/a><\/p>\n [3] Inc.com. \u201cInstead of charging for software, the idea was to do a hub-and-spoke model. http:\/\/www.inc.com\/magazine\/201503\/liz-welch\/hr-technology-with-benefits.html<\/a><\/p>\n [4] In an article written in the March Employee Benefit Advisor<\/em>, Parker Conrad, CEO of Zenefits, openly stated Zenefits does not want to get into the payroll game. He says: \u201cThe reason is that payroll is really complex and there are really high switching costs. We\u2019d much rather just be connected to everyone in that space and be friends with everyone in that space.\u201d<\/p>\n [5] ADP.com. The facts about ADP & Zenefits: Response to the claims made by Zenefits. http:\/\/www.adp.com\/zenefits\/downloads\/The-Facts-About-ADP-and-Zenefits.pdf<\/a><\/p>\n Trademarks in this blog post are the properties of their respective owners.<\/p>\n","protected":false},"excerpt":{"rendered":" A disagreement between ADP\u00ae, one of largest payroll processing companies, and Zenefits\u2122 a self-described startup that recently raised $500 million at a $4.5 billion valuation has now been escalated to the court room. This disagreement centers on the method that … Continue reading