There are seven criteria brokers should use when selecting a benefits administration platform. In this column, we’ll discuss the first — the company itself.
Is it venture-backed? Owned by insurance companies? Is it associated with a general agency? Or maybe a different benefits brokerage? Is it cash-flow positive or burning through money? Each scenario creates a different dynamic that can have implications for your agency’s success.
Why? Because depending on the background of the vendor, your platform partner’s incentives may be aligned with your own, or different. No matter which background the platform has, there are ways that brokers can mitigate any negative consequences. Here are a few things to consider about each scenario.
Zenefits is the epitome of a venture-backed firm. It achieved fast growth quickly, fueled in large part the same way many brokerages grow — relationships. The fast growth Zenefits got via those relationships coupled with its location allowed it to raise a lot of money, fueling buzz and more growth from start-ups and other entrepreneurial businesses across the country.
The company proceeded to spend a lot of investor money in an effort to achieve a growth target that their venture capitalist backers — who had absolutely zero background or knowledge about health insurance or the business of advising employers on their benefits package — thought was correct.
The lesson for you? If you’re evaluating a company that is venture-backed, ask about the venture capitalists who may really be the ones calling the shots.
Are they going to push this company to grow faster than is possible, causing an implosion whose after-effects will impact your business as well? Or do they know insurance and benefits and understand that growth needs to be managed responsibly, and sales growth cannot go beyond the systems and processes that the software company has in place to support?
How much money have they raised? Is it so much that the pressure for financial results may lead to decision-making that focuses too much on the short term? How can you prevent that from hurting your firm or your clients?
Owned by insurance companies
If an insurance company or a group of insurance companies owns the firm you’re evaluating, then you have an entirely different set of questions to ask.
Some of the questions are obvious. Do you have to offer that insurance company’s products in order to use the software? Is the insurance company’s name going to be on the software? Will other insurance companies avoid working with the software company because of the presence of the one that is an owner?
In other words, if Acme Insurance is a big owner of the software company, will that make Beta Insurance reluctant to let you offer their products on it?
And then there is another set of questions. These revolve around the roadmap for product development. Is the insurance company setting the roadmap? Is that roadmap aimed towards solving problems for the insurance company, or solving problems for your agency or for HR? Insurance companies have their own problems to solve, completely unrelated to what your employer clients or even your agency cares about.
You will want to understand how the product development roadmap is set and who makes those decisions.
If you see a lot of headlines about how the product is “powering” some facet of the insurance company’s online systems or quoting engines, that can be a sign that the software company is designing for the insurer rather than for HR or for agencies.
Associated with a general agency
Just like with an insurance company, a general agency is a step away from the employer client. As a result, it will not have as sharp an understanding as you do of the challenges the employer has. It will be tempting for them to demand that the product roadmap disproportionately include solving the general agency’s problems rather than the employer’s problems. Eventually, this can mean that this company ends up with a less attractive feature set for your customers.
If you’re going to go this route, you need to get comfortable with the idea that the software firm is not going to be as attentive to the needs of the employer clients you serve as you are, and should give you the flexibility to offer whatever insurance products you want within what the firm can support.
Associated with a benefits brokerage
The bottom line with this sort of firm: You need to get comfortable with the idea that it is not going to go and start calling on your clients.
The primary advantage of this type of firm is that it should be just as in tune as you are with the needs of the employer and the agency. After all, it hears directly from employers just like you do and it has close knowledge on what it is like to be a broker living and dying by a possible AOR change. It should also understand agency operations better than a general agency, insurance company, or venture capitalist possibly could.
And its product roadmap should be aligned with what you would want: Solving for employer and agency needs. It should have a product lead today and that product leadership should extend as competitors who are associated with venture capital, insurance companies, or general agencies focus too much on needs outside of what the employer and agency need.
But that brings us up to the concern that this type of firm is going to end up calling on your clients – and trying to get the AOR for its own brokerage. One approach to this is to ask for what is called a non-solicit agreement alongside your license agreement that forbids the associated benefits brokerage from being able to call on any clients that you put on the software.
Beyond that legal protection, it is also worth evaluating the actual likelihood that this company’s benefits firm is going to start calling on your clients. Is their benefits brokerage near you geographically? Are you in a market that would be easy for their brokerage to access? Does their brokerage believe in the idea of a call-center approach to benefits, or does it believe in the importance of a local advisor where there is a strong relationship between the advisor and the employer?
Cash flow positive
Finally, it is important to consider the financial strength of the firm. Imagine you sign an agreement and begin transitioning your clients and then they go out of business. It happens. Benefitbay is just one example. It raised money, signed a big agreement with Humana, and got some traction with agencies nationwide. But they were never cash flow positive and were unable to continue raising money. They ended up having to close the business.
That was terrible for the individuals who poured so much into trying to make it successful. It was also terrible for the agencies and the brokers and service people who had poured money, time, and energy into learning about how their system worked or even moved clients onto their system only to now have to move them somewhere else.
If you’re talking to a firm whose salesperson makes a big deal about how they raised $2 million from a venture capitalist last year, keep in mind that venture capitalists expect eight out of ten of their investments to go out of business. In other words, raising venture money alone is by no means evidence of a sure thing.
At the same time, nothing in business or life is a sure thing. When you’re gauging the strength of the software firm, ask them if they are cash flow positive or profitable.
If not, when do they expect to be profitable? Do they have partners that signal strength? One pilot agreement with Humana was not enough to save Benefitbay.
But if you see that they have agreements with multiple, big industry players, that can be a good signal that they are financially strong and sticking around for the long haul.
When comparing systems, it can be easy to focus on feature comparisons and the day-to-day operations of your potential platform. But be sure to ask the tough questions of your vendor’s background — if they aren’t able to answer or answer sufficiently, you may want to evaluate another option.
This column is adapted from the book “Online Benefits Technology: The Strategic Broker’s Guide.”