As a follow-up to yesterday’s Fast Company article, “How Sherpaa Survived Venture Capital’s Unrealistic Expectations,” I’ll be writing a series of articles about the lessons I learned from building Sherpaa over the last 5 years and how these lessons will influence the next 5 years. Here goes…
HR Sales is Hard (maybe impossible?)
Companies are suffering from learned helplessness. After being sold wellness, video visits, cost transparency tools, etc. for decades and continuing to see their premiums increase, they think there’s nothing they can do to control costs.
The stakeholders within companies are the CEO, CFO, HR, brokers/HR consultants, and the employees. The CEOs want happy employees who help grow their business. The CFO wants to save money without spending money. HR wants happy employees with as little work as possible (they’re busy!). Brokers want to retain revenue from their clients by not rocking the boat. And employees want free healthcare. All of this points toward companies with learned helplessness looking for something for free. As we all know, free is free for a reason.
A company’s stakeholders are patients too. Today’s patients want everything covered and they want it to be free. “Patients” will pay $200 for a gym membership and complain about a $20 office visit co-pay. If I had to pay $20 to go to the DMV, I’d be mad too.
Closing a sale is often tied to an open enrollment date and the introduction of next year’s healthcare options for a company’s employees. This means HR sales is extremely chunky tied to the end of the year and not consistent throughout the year. Companies are very hesitant to introduce anything healthcare at any point of the year. There’s a belief that employees will struggle processing that much new information compounded by the low open rate for emails sent from HR. Also, you’d be surprised how many large companies, especially in the manufacturing industries, do not have email addresses for their employees. If a company uses email to communicate with employees but they don’t provide devices for their employees to check their email, this would be an unreasonable, unreliable, and unenforceable means of communicating.
Most brokers aren’t incentivized by saving companies on insurance premiums. And if they recommend a service that doesn’t deliver on their promises, they risk losing trust from their client. So brokers and HR consultants recommend safe “nobody ever got fired for hiring IBM” solutions.
Aligning the interests of the CEO, CFO, HR, employees, brokers, and HR consultants is nearly impossible. The only way to do this is to offer a “free” or nearly free service. And, like I said, free services are free for a reason. TelaDoc is a perfect example. They typically charge $1 per employee per month to their clients (employers, insurers, etc.). The company gets to check the box that they now offer “telehealth.” And 2–3% of employees use the service. Meanwhile, 60% of their revenue comes from the $1 PEPM charge. It is true that TelaDoc is a business. But are they a relevant business that’s going to fundamentally improve healthcare? Or are they just a business targeting companies to take a minuscule slice of a massive piece of healthcare pie? Doctor on Demand attempted to disrupt TelaDoc by not charging the low PEPM fee, but abandoned that after realizing actual video visit usage is not a sustainable business model that meets the expectations of VCs and Dr. Phil who have plunked $87M into a video visit clone. Let’s just do the math. If they charge $49 a visit, and they take $10 and $39 goes to the doctor, how many visits over the course of 7 years would they have to to get Dr. Phil his 10x $870M return? TelaDoc only does 200,000 visits a quarter (0.07% of all doctor visits in America per year). That’s a lot of video visits in a short period of time to be a real VC-level business.
HR Directors aren’t experts on health policy or healthcare delivery. It’s hard to understand the difference between traditional video visits and Sherpaa. Video visits are limited in capability to simple things like pink eye and they’re just above nurse triage lines, but just below Walgreens nurse clinic visits, in capability to diagnose and treat. Sherpaa recently diagnosed testicular cancer in a patient and arranged surgery for him and he was back home three days later after a successful treatment. These are hard things to understand, especially when you’re not a doctor or a patient who has personally experienced video visits vs. Sherpaa. So many HR directors, when they see they have “telehealth” as a bundle from their insurance company can’t wrap their head around needing anything more.
The HR sales cycle is typically 9 months to a year. HR Director churn is every 2 to 3 years, on par with most positions. A new HR director either wants to make a splash or not rock the boat. If they want to make a splash with the CFO, they’ll look for fat to cut. If they don’t know the value of an expense, they’ll go on a cutting spree. This means that HR sales is a constant process. When there’s a new HR director, essentially the sales process starts over to convince the new director of the value of the expense. It’s a bit easier when a company has a multi-year history with the service, but HR sales is constant re-selling. There are certain needs HR has that are fundamental, like payroll. If an HR solution is a strategy (like getting healthcare costs under control), not a requirement like payroll, there is no fire to put out.
HR directors receive ~20-30 email solicitations a day from sales people trying to sell them damn near anything and everything. There’s been a marked increase in VC-funded B2B services and we’re all competing for the same attention. In fact, we’re all competing the same way — automated email campaigns because there’s been a ton more of VC-funded automated sales tools available. Nobody picks up the phone anymore, rightly so. And physical mailings aren’t automated and hard to use data to drive change. There’s just so much noise. Also, what company stakeholder do you reach out to about healthcare? How do you find out if a company is self-insured or fully-insured? How do you find out who the company’s broker is? If you go around the broker, they don’t like that, and they’ll probably sabotage your efforts. If companies aren’t working with one of the big insurance broker firms, the broker relationship is still a good old-fashioned “I know a guy” or “our broker is the CEO’s aunt.”
HR sales is about relationships. If, during the 9 to 12 month sales process, the HR team is introduced to new sales people, the relationships, and therefore the process, essentially starts over. It’s that simple. If you or your investors think you need to hit reboot on a sales team, you lose 9 to 12 months, which is over half of the 18 month runway you’ve got in between funding rounds. It’s best to improve and work closely with the team you have rather than rip out a team and take another chance on a new team that comes with zero guarantees. Avoid this strategy like the plague. A sales leader is but one out of many potential contributors to slow sales growth.
What are HR Incentives and Capabilities?
Many small companies outsource their HR to PEOs like TriNet, JustWorks, Zenefits, and the clones now competing on service and UX. Professional Employment Organizations are these legacy entities originally designed to pool small companies together, actually legally employ the “employees” of small companies, and use their purchasing power to secure lower insurance premiums at rates available to large companies. As part of this deal, they added payroll and other benefits as part of their tech platforms. Over the years, their fees gradually increased (on the order of $180/month/employee) offsetting the gains from the lower insurance premiums. This means that small companies of 50 people are just as monolithic as large companies because their HR strategies are actually decided by their PEO, which is really just a fake 250,000-employee “company.” Any benefit or strategy a small, hip company would invest in to decrease their healthcare spend could not benefit their company, because their company was just 50 employees out of 250,000. As an aside, we saw many companies who stayed on a PEO too long and were still using a PEO at 500 employees or so. When they wanted to transfer off a PEO, they found that they were uninsurable and their only option was to go self-insured because PEOs won’t carve out your 500-employee claim history to share with potential insurers so the new insurers could understand their risk. Your employees legally weren’t your employees, they were the PEO’s legal employees and they don’t want to lose your business. This happens more than you think.
If companies are less than 100 employees, under the ACA, they are legally community-rated meaning they all pay essentially the same rate for health insurance. Any investment they make into the healthcare/costs of their employees legally could not have any impact on their healthcare costs. Companies over 100 employees are experience-rated meaning their costs are based on actual employee healthcare usage and strategy. This means that small companies cannot be the innovators or engines of change for strategies to control healthcare costs. The ACA redefined this change from 50 employees to 100 effectively making it harder for innovations to work with smaller companies. And once a company is over 100, there has to be a very clear ROI, because now that investment can impact costs. In order to generate any sort of ROI data, you must have the ability to work with companies over 100 employees for many years. The one things startups don’t have is time.
When a company is larger than 100, nowadays they typically have employees in multiple states. Healthcare is essentially a disconnected series of geographical oligopolies. If your service cannot work for all employees because of the geographical and regulatory issues of state-by-state and city-by-city regulations and oligopolies, it’s a much harder sell. Companies must be willing to invest in a strategy for some, but not all, of their employees. Typically, they don’t like to do that. Sherpaa is currently operating in ~46 states, but we only accomplished this a little over a year ago due to the time and expense of licensing our doctors and the technology we had to build to match up patient legal addresses with our doctors’ state-by-state medical licenses. This is a huge chicken and egg problem for much of healthcare.
The larger the company, the less appetite they have for taking chances on “unproven” innovations. When you’re talking to companies of 50,000 employees, the strategy you settle on is typically a pilot. That’s not bad, but pilots can get lost. Just as there’s the concept of “death by pilot” when startups are selling into healthcare institutions, with companies, you run the risk of ongoing pilots that never get bigger. A pilot of 2,000 people in a 50,000 employee company is valuable. But getting those pilots in a 12 month sales cycle in 18 month funding windows is no joke.
Lessons for founders
There are literally only 4 entities in America that are financially responsible for the health of a population of people:
- The Government
- Health insurance companies
- Self-insured Employers
After 5 years of betting on employers to be the main driver of innovation and healthcare cost containment, I have to humbly say I lost that bet. That’s not to say there aren’t visionary companies out there. There are. Our corporate clients are inspiring. But the number of them available to leverage under the pressure of VC expectations is minuscule.
That being said, here are a few other lessons for other founders dependent on HR sales.
The founder should never step out of the following processes until your company is almost fully predictable:
Revenue is your #1 priority and you shouldn’t turn that over to anyone but yourself until you are 100% confident in the ability of your sales team to sell without you. “A company isn’t scalable until you prove the founders aren’t required to sell” is 100% bullshit. Every company has a different point in time at which this happens and if you call that too early, you’ve made a grave mistake. I’m currently part of every sales effort and I enjoy that. Would you trust a flashy sales guy or a doctor who founded the company?
If your vision started the initial success, your vision should improve on that success for years to come. There’s nobody more passionate and thoughtful about what you’ve built from the ground up than you.
There’s no better insight than the frustrations or praise from your customers and both are intimately tied to revenue. I’m currently manning our intercom and it is invaluable. Happy customers means happy revenue.