ADP slams Zenefits: ‘We have never integrated with Zenefits in any sense” – and Zenefits aggressively fires back

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Screen Shot 2015-06-09 at 5.12.46 PMTo say that all-in-one human resources software company Zenefits and payroll software industry titan ADP have had a bit of a misunderstanding recently would be a massive understatement.

Zenefits, which offers a variety of free services, including a way to integrate HR software with payroll tools, sent out an email to customers on Friday informing them that ADP had suddenly cut off ties with Zenefits, leaving thousand of customers in payroll limbo.

The email from Zenefits CEO Parker Conrad, part of which was posted on Y-Combinator’s Hacker News is posted in full at the bottom of this article. The email informed users that without their permission, ADP had “systematically deactivated these accounts—accounts that you set up, in your payroll system, to allow Zenefits to work on your behalf.”

In the email, Conrad speculates on the payroll giant’s motives. “ADP believes it can one day build software to compete with Zenefits, and in the meantime they would like to do anything they can to impede Zenefits,” he wrote.

In the email, Zenefits CEO Parker Conrad didn’t pull any punches, going so far as to call ADP’s behavior “unethical” and saying that the company is using Zenefits’ customers as “pawns in their corporate chess game.” He goes so far as to offer those effected $ 1000 and an opportunity to switch to Intuit’s payroll system.

ADP quickly responded with a PDF outlining Zenefits’ claims and dismissing them while explaining why they cut ties with Zenefits.

ADP didn’t seem to hold any of its opinions back in the response, claiming that it never gave access to Zenefits in the first place:

We have never integrated with Zenefits 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 chose an unsecure and indirect approach.

Specifically, ADP claimed that Zenefits was accessing its system by a seemingly back channel method. It also said that there was a specific incident that led to it cutting off Zenefits’ connection to its system:

On June 4, we disabled Zenefits access to ADP’s 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. Despite Zenefits serving less than 0.25% of the clients on our system, they had been responsible for up to 25.0% of the total user traffic (in other words, a hundred-fold times ordinary user traffic).

According to ADP, Zenefits had become a security and data theft threat, claiming that the spike in traffic also coincided with unprecedented access to private ADP user information.

The Zenefits approach was not only putting excessive and unnecessary demand on ADP’s servers, but it was pulling sensitive information, including unmasked Social Security numbers and employee banking information, in a manner that did not comply with ADP’s standards for data security. We would have been happy to discuss a solution with Zenefits, but they never reached out to us or responded to our requests to resolve the issue.

Instead, they chose to impugn our motives and integrity in a public forum.

Not being one to take the attack lightly, Conrad wrote a blog post today saying that “Since the day these small business accounts were turned off, we’ve done everything we could to work with ADP to restore access, but have been met with resistance every step of the way.”

The Zenefits CEO also pointed out that attempts in their attempts to contact ADP, they’ve been pointed to the payroll company’s lawyers. As Conrad explained:

At the end of the day, this dispute is about customer choice. We want small businesses to be able to choose who they want to use to help administer their payroll — whether it be Zenefits, or any other bookkeeper, accountant, or HR outsourcing firm. We’re willing to fight for that belief because we believe in standing up for competition and for small businesses — even in the face of ADPs legal threats.

In an interview with Conrad this afternoon, the CEO said “Isn’t this crazy, ADP has been around for about fifty years and here they are torn up over this two-year old company.”

He said that Zenefits initially found out that something strange was going on with ADP in the last couple of weeks in May, when customers were reporting that they weren’t able to integrate their new Zenefits accounts with ADP’s payroll system, something that hadn’t been a problem for two years. The timing of this is something that Conrad will go back to point out some holes in ADP’s claims, specifically that it was the June 4 traffic spike that led to the action to shut off access to Zenefits.

Conrad said that on last Thursday, ADP shut off access to ADP accounts which he said that Zenefits customers had set up on their own because payroll isn’t a service that it offers. In terms of the spike in activities, Conrad said that the activity logs showed now such spike on its side. “We tried to get them to send us their charts on this and asked them IT teams, and they refused, and told us to talk to their lawyers,” Conrad said.

He said that when ADP told him that the spike occurred on June 4, he told ADP that they had “screwed up the timing,” because its support reps had been shutting people out of ADP’s system for weeks prior.

According to Conrad, the reason has more to do with ADP and Zenefits having competetive products. “Really, what I think is going on is that ADP, particularly in its small business division, serves as an insurance broker as well,” Conrad said. “What I think this is ultimately about is them elbowing out a competitor. Basically they are creating a lot of need for their clients so that then when they have their own similar products, they can offer them to clients.”

“The irony of all this is,” said Conrad, “that a big reason that I started Zenefits in the first place was a frustration I had using ADP’s system at my previous company.”

I reached out to ADP’s corporate communications director who said that the company didn’t have anything to say to this issue beyond the PDF it put out, “The Facts about ADP & Zenefits: Response to the claims madeby Zenefits.” When I asked his thoughts about Zenefits disputed timeline and account of what’s happening, he said “We stand by our statement.”

Both sides will probably continue to stick to their guns on this one, so it doesn’t seem as if the relationship is going to be fixed anytime soon.

One point that Conrad made is absolutely spot on. That is that the companies that use both services, and their employees, could be affected by the dispute. “Unfortunately, what this means is that a lot of our mutual clients are caught in the crossfire of this.”

Here is Conrad’s initial email to his customers in full:

When you originally set up Zenefits, you created an Zenefits admin user in your ADP RUN payroll account to let Zenefits manage your payroll—set up new employees, manage deductions, remove departing employees—on your behalf.

Yesterday, without your permission, ADP systematically deactivated these accounts—accounts that you set up, in your payroll system, to allow Zenefits to work on your behalf. The reason for this is that ADP believes it can one day build software to compete with Zenefits, and in the meantime they would like to do anything they can to impede Zenefits.

ADP is claiming that they are taking this action for “security” reasons—but this is clearly not true. For years, ADP has let customers add third parties—a bookkeeper or an accounting firm, for example—to their payroll system to manage payroll on a company’s behalf. What Zenefits does is no different. In fact, even today, ADP will let you add a third-party administrator to your payroll system unless they have a Zenefits.com email address.

What’s high-handed about their approach is that Zenefits is still completely compatible with ADP payroll. All they’ve done is make it more inconvenient for you, their customer.

By default, we will start emailing you whenever there are changes that need to be made to your payroll system. We will detail exactly the changes that need to be made, and you can make them yourself in payroll. It’s less convenient this way — and frustrating that ADP has decided to create more work for their own clients in order to attack Zenefits. But beyond this, nothing will interrupt your use of Zenefits.

We are also working on other options for restoring automated payroll. Zenefits’ mission is to make running your business as effortless as possible, and our support team will follow up shortly with additional information on how to resolve this issue.

We think it’s outrageous—and unethical—that ADP is making these changes to your payroll system without your permission, and is creating this complication for you in their attempt to block Zenefits’ service—essentially treating you like a pawn in their corporate chess game.

If you’re as upset with ADP as we are, you can sign this Change.org petition. In addition, if you’re interested in switching from ADP payroll to Intuit Payroll, we’re paying customers $ 1,000 and helping them to make the switch. We’ll include instructions for this in our follow up communication.

We remain committed to working with ADP to find a solution to make this problem go away for all our mutual clients. In the past, we’ve directed many payroll customers to ADP, because payroll is not a service we provide. We’ve tried contacting them, but so far they have refused to return our calls. If they have any genuine concerns, we are happy to resolve them, but they have yet to express them to us.

PandoDaily

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David Sacks joins Zenefits as COO, board member, and investor. Is compared to LeBron James and Jay Z

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David Sacks - Lebron

“When you have an opportunity to hire LeBron, you hire LeBron.”

It was with this matter-of-fact explanation, that Zenefits co-founder and CEO Parker Conrad summed up what might be the most impactful decision in his already impressive company’s young history.

Beyond raising nearly $ 84 million in less than two years since first launching the small- and mid-sized business (SMB)-focused SaaS HR platform. And, beyond growing faster than any enterprise software company in history – a staggering 30 percent month-over-month – including recent darlings Workday, Yammer, and NetSuite. Conrad and the company’s board are betting Zenefits’ ability to maintain, and dare they predict accelerate this growth on the addition of their Lebron: David Sacks.

Sacks, the founder of Yammer (acquired by Microsoft for $ 1.2 billion) and former PayPal COO, has agreed to join Zenefits as its Chief Operating Officer, and will also be joining the company’s board of directors and making what the parties describe as “a significant [but unspecified financial] investment.”

It’s a bold move for a company that is by all measures a rocket ship, with a product-focused CEO who is by all accounts a rockstar, to bring on another enormous personality with many of the same attributes. But at the same time, the alignment between Sack’s experience and Zenefits’ current direction and growth-induced challenges could not be a better fit. Conrad and Andreessen Horowitz* (A16Z) partner Lars Dalgaard, along with the rest of the board, are betting that Sacks’ addition will be exponentially additive to the business.

“Parker [Conrad] is a world class product builder,” Dalgaard says. “Add in Sacks and, holy shit, the synergy is going to be insane. I mean look at the things he’s been involved in – PayPal, Uber, AirBnB, Yammer. I’m quasi-jealous that I don’t get to work on the front lines along with both of them.”

Where Zenefits and Yammer share similarities is in the two companies’ effectiveness in delivering consumer levels of product usability to solve enterprise problems. Sacks is credited with pioneering this type of approach at Yammer, and Conrad has grabbed the baton and continued running. Together, the theory goes, Zenefits will have two product visionaries and twice the leadership muscle available to execute those ideas.

But with any change as significant as this one atop an organization, there’s reason to give pause and ask, what could go wrong?

It has been since Sacks left PayPal in 2002 that he has been anything other than the senior-most decision-maker in any sizable company. It’s also been at least that long since he’s held a senior management role at a company that he didn’t found. The act of buying in, wholeheartedly, to another founder’s vision, and then answering at the end of the day to that person, as your boss, will no doubt be a different experience – especially for someone as successful and highly-regarded as Sacks. Put another way, that’s a lot of ego and personality to fit in one C-suite.

Dalgaard seems unfazed by this possibility. In fact, if I had to describe his attitude toward Sacks joining the Zenefits team, I’d call it jubilant. Or maybe ecstatic. Or out-of-his-goddamn-mind-excited. At least, that’s the way it came across when we spoke over the phone earlier this afternoon.

Like most people, Dalgaard has enormous respect for what Sacks has accomplished. And, coming from the founder of SuccessFactors, which achieved its own $ 3.4 billion, that’s high praise. But where Dalgaard had the most good things to say about Sacks was around his approach to this new role and in the way he and Conrad have begun to mesh.

“This could have gone so many other ways, when you put two rockstars together like that,” Dalgaard says. “But they remind me of Jay Z and Timberlake. Did you go to that concert? When they were up on stage together, they wanted to play together, to share the stage. It made it so much better for all of us in the audience. And that kind of thing is a leading indicator of how revolutionary businesses will be built. The modern world of management is collaborative. Sachs is about, ‘Whatever needs fixing, I’m gonna jump in and fix it,’ rather than complaining about ‘Why don’t I have sales?’ It would have been much harder to convince Parker if it wasn’t David we were talking about.”

As Dalgaard pointed out later, Sacks has nearly unlimited choices about how to spend his time. With more money than he could spend and, by his own admission countless offers to become a VC, the very fact that he’s joining Zenefits – and also investing his money into the company – represents a major vote of confidence.

About that investment, Conrad tells me that he was initially surprised by the suggestion – after all, incoming executives typically get equity grants as part of their compensation package, they don’t buy shares. But the opportunity to have Sacks involved in any way possible was a welcome one.

“For me, investing is a sign of my commitment to the company,” Sacks tells me. “If I’m going to invest all of my time, I wanted to make a financial investment as well.”

“It’s more common than you’d think [for incoming execs to also invest],” Dalgaard says. “The only reason it’s somewhat uncommon is that few people have the money to do it when taking a role like this. To me it just says that he want to maximize his ownership benefit and that he understands secret economics of, ‘when you find the right one, go after it with everything you’ve got.’ Sure, as investors, we don’t like to get diluted. But we just ask, ‘Will this person be worth the dilution?’ We think that David could make this a $ 50 billion company, which would be a first in this category.”

As Dalgaard notes, Sacks won’t be a traditional COO in the (Steve Jobs era) Tim Cook or Sheryl Sandberg sense, meaning he’s not being hired to keep the trains on track while some mad scientist CEO focuses on the big picture. Rather, his role will be to act as more of a fixer or pinch hitter executive – Conrad used the word “partner” – to take on and own whatever area of the business needs his attention at any given moment. In broad strokes, he will be involved in product, operations (including customer support and account management), and finance. But, from the sounds of it, those are hardly lines drawn in permanent marker.

“I’ve had a lot of those conversations [about becoming a VC], but I realized I like operating a lot better,” Sacks says. “Sure, it’s fun to be an investor because you get to participate in a lot of things in a lot of small ways. But for me, it’s more fun to be a big part of companies, particularly ones growing at breaknet speed. The thing that impressed me is that Zenefits has done in one year what it took Yammer three years to do. They’re resetting all the benchmarks. They’ve grown something like 20-X in the last year.”

Zenefits’ growth has been truly otherworldly. In addition to 30 percent monthly revenue growth, the company has grown its user base 1,600 percent this year, reaching 2,000 businesses with over 50,000 employees across 47 states. And after starting the year with 15 employees, Zenefits now has grown its full-time headcount to 470 (including 120 in a Phoenix satelite office) and has sights set on reaching 1,300 by the end of 2015. With that kind of scale and pace comes an entierly new set of challenge, ones that few people have ever seen. Sacks, it just so happens, has seen them twice and found success both times.

A16Z took the unusual step of leading both Zenefits’ Series A and Series B rounds (coming in January and June of this year, respectively), making the firm far and away the largest outside shareholder in the company. Dalgaard says he’s met with Conrad at least once a week, each week, for the last year – an unsurprising fact given the promise and pace the business has demonstrated.

“The thing is the management team is executing, and we’re happy, so this isn’t a situation where we’re saying we need to fix this,” Dalgaard says. “It just that the growth is so big. Really, it’s that there’s so much to go after, that we can’t go after it all with the current structure and the current team. But we can go after more of it with [Sacks.] Blasphemous as it sounds for a technology startup, sometimes you actually have to consider not growing so quickly unless you have the right people. Now we have the righ people. David has that special X-factor. Everything he touches is just magic, he has magic coming out of him.”

Zenefits already appears destined for greatness, so it’s hard to imagine things could get much better. But, just as when aiming a rocket ship for the moon, it only takes one small wobble for things to end up massively off course. Adding Sacks to an already well-oiled machine is certainly a gamble. But it’s a calculated gamble Conrad and Dalgaard appear eager to make. Sacks too, is voting with both his time and his wallet.

[*Disclosure: Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon are investors in Pando.]

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