The Powerful Relationship of Technology and Economic Moats

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another), the network effect (the value of the product increases as more people use it), intangible assets (brand identity, government licenses and patents), cost advantage (producing goods at a lower cost than competitors) and efficient scale (average unit cost declines as production volume increases). An Industry Long Overdue for Digitization Innovation is the hallmark of exciting growth-oriented sectors, such as Information Technology, but as Alger CEO Dan Chung explains in his blog on Internet 3.0, the powerful surge of digital technology is extending to all industries and business practices. Human resources (HR), a business area long overdue for change, is an example. HR records have traditionally been paper based and information that has been captured electronically has been stored in different databases, which has made it difficult to analyze information and conduct other HR functions. In the face of those challenges, businesses are using cloud computing to streamline HR functions (See Fig. 2). Paylocity, which provides cloud-based payroll and human capital management technology primarily to smaller to mid-sized companies, is a beneficiary of businesses increasingly digitizing HR functions. Among other services, Paylocity offers tax-advantaged programs, such as Flexible Savings Accounts and Health Savings Accounts, that enhance an employee’s experience. We believe the following factors are helping the company to either sustain or enhance its competitive moat: • The cloud structure of Paylocity’s technology enables firms to digitize their operations and conduct HR processes faster, better and less expensively than by using services frommore traditional competitors. • The robustness of Paylocity’s offerings and breadth of services for clients make the company’s user base inherently sticky. • By adding clients, Paylocity benefits from efficient scale while expanding its technology offering. Education Gets Smarter Dusty and squeaky chalkboards eventually gave way to whiteboards. Today, Chegg, Inc. is further revolutionizing the learning experience. The company provides textbook rentals, study aids, writing assistance, tutoring and math EATHERBIE CAPITAL

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MSCI EAFE P/E Relative to S&P 500

Figure 2: Companies Are Increasingly Using the Cloud for HR

73%

40%

33%

Using the Cloud

Percentage of Companies

Companies with a Core HR System in the Cloud

Companies with at Least One HR Process in the Cloud

Companies Planning to Migrate to the Cloud in the Next 12-18 Months

Source: 2017 PricewaterhouseCoopers HR Technology Survey of over 300 Companies.