âThis will be the month where we close the chapter on all that stuff, we move past it and we launch the future of the company,â Mr. Sacks said.
Yet Mr. Sacksâs efforts to resurrect Zenefits highlight the difficulty of conjuring up second chances in tech. By all accounts, the new chief executive has mounted an unconventionally aggressive plan to tackle Zenefitsâs challenges. But even doing everything right may not be enough.
In the months that Zenefits has been rebuilding itself, a spate of competitors have set their sights on its business. One of them, a well-financed start-up called Gusto, has put ethics and culture at the core of its appeal, and it has been scooping up disaffected Zenefits customers.
âTo borrow a quote from a different context, âWhen someone goes low, we go high,ââ Joshua Reeves, one of Gustoâs founders and its chief executive, told me. âItâs about trust. And when you endanger that trust, itâs hard to rebuild it.â
Credit Peter DaSilva for The New York Times
Now the two companies are racing to lead a multibillion market. In a recent interview that spanned several hours, Mr. Sacks explained in exacting detail everything he has done to fix Zenefits, and argued that the company still has the inside track on what could be the next great software bonanza. It sounded convincing â but many of his points are echoed by Mr. Reeves of Gusto.
Gustoâs and Zenefitsâs business may sound boring: Both are trying to become the primary human resources dashboard for small businesses, companies that hire a few to a couple of hundred workers. For years, small companies have been neglected by traditional software providers for a simple reason: They donât have a lot of money to spend on software.
The internet has altered that calculus. Zenefits and Gusto, which charge subscriptions for some of their services, are relying on the vast scale and technical efficiencies enabled by the online cloud to make serving tiny companies feasible. Their success could alter how millions of American businesses manage, pay and provide benefits to tens of millions of workers.
Both are finding takers. Gusto, founded in 2011 as ZenPayroll (people in this business apparently love the Zen mind-set), has attracted 40,000 paying customers. In a funding round last year, investors valued the company at $ 1 billion. Zenefits started a couple of years later, but it grew faster and was once considered one of the fastest-growing business software company of all time. In 2015, two years after its founding, investors valued Zenefits at $ 4 billion, and it had ambitions to hit $ 100 million in annually recurring sales.
But the wheels were coming off the wagon. Zenefits under Mr. Conrad was consumed by an insatiable mania to grow at any cost. A year ago, BuzzFeed reported that Zenefits had allowed unlicensed brokers to sell health insurance to customers.
The article kicked off an internal investigation that led to the discovery of the cheating software. Mr. Sacks, an experienced start-up entrepreneur who had joined Zenefits as chief operating officer in late 2014, said he learned about the cheat from the companyâs outside counsel in January; he elevated the issue to the board of directors, which pushed Mr. Conrad to resign. (Mr. Conrad, who is now working on a new human resources start-up, did not respond to requests for comment.)
Faced with investigations by regulators and outrage from investors and customers, another chief executive might have sought to minimize the fallout from Zenefitsâs problems. But Mr. Sacks pushed an unusual counterstrategy for rehabilitation, one he sums up with a simple mantra: âAdmit, fix, settle and repeat.â
âThe turnaround strategy of this company has been to reject âdamage control,ââ Mr. Sacks told me. âDoing the right thing has been the crisis management strategy.â (Other tech companies facing a crisis, like Samsung, may want to take note.)
Credit Peter DaSilva for The New York Times
The process has been marked by radical candor about Zenefitsâs problems, and a willingness to make bold moves to fix them. Mr. Sacks immediately removed several executives who had typified Zenefitsâs hard-charging ethos, and he changed the companyâs philosophy from âReady, Fire, Aimâ to âOperate With Integrity.â He negotiated new agreements with investors who had been agitating to sue, taking a haircut on Zenefitsâs valuation â now the company is worth $ 2 billion.
Itâs tempting to dismiss Zenefitsâs new ethos as mere survival; everyone who gets caught suddenly finds religion, you might say. But Zenefitsâs most important constituency, its regulators, appear to believe its sincerity.
In April, Joshua Stein, the companyâs chief compliance officer, made an impassioned plea to the National Association of Insurance Commissioners, arguing that Zenefits had seen the errors of its ways and deserved a second chance. Mr. Sacks called the speech a turning point for the firm. Eight states have settled with Zenefits so far, and more settlements are on the way.
There is an irony to Zenefitsâs reformation: In altering the companyâs culture, Mr. Sacks has pushed Zenefits to become much more like its biggest rival. Compared to Zenefitsâs once-freewheeling, highflying sensibility, Gusto has always operated closer to earth. Where Zenefits pushed for nationwide expansion and invested millions of dollars in a sales staff to encourage rapid growth, Gusto sought to escape what Mr. Reeves calls the âSilicon Valley hype cycle growth curve.â
He favored a slower, more deliberate growth plan, encouraging a corporate culture that he said prized long-term sustainability. Though the two companies are just blocks apart from each other in San Francisco, in their early years each one felt like a universe apart.
At Zenefits, the sensibility was one of a boiler room â packed to the gills, every employee on the phone, all of them cheering every sales goal. By contrast, Gustoâs office has the air of a meditative retreat. There are plants, couches and people chatting in hushed tones. Shoes are not allowed in the office, to make it feel more like home than work.
Mr. Reeves told me that Zenefitsâs âimplosionâ had been a boon to Gusto. âI used to have to spend a lot of time making sure that the team and our investors were not distracted by the attention they were getting,â he said. âSo when things came to light, it made it easier â because our internal conversations about their shortcuts were proved true.â
Mr. Sacks dismissed the idea that Zenefits had imploded. Most customers have stuck with Zenefits despite its shortcomings, he said, and he predicted that the unveiling of the product next week would win back everyone else and then some. In other words, now that Zenefitsâs culture is cleaned up, the company is once again ready to take on the world.
He made it sound easy. But turnarounds usually arenât.