Morgan Stanley
  • Research
  • Jun 17, 2019

Is 'New Stack' the Future of Business Software?

Rapid changes in the digital era have put software development on the C-suite radar. Why “New Stack” could be the key to unlocking business productivity—and investor interest—in the years ahead.

  • Software has risen to a board-level discussion as business leaders in every sector recognize the tie between robust digital offerings and competitiveness
  • This has prompted the rise of “New Stack” software development technology which enables higher developer productivity and a faster pace of product innovation
  • "New Stack" could represent a roughly $50 billion dollar market in the coming years, growing at annual rate of over 20%

In the digital era, businesses now rely on a staggering number of critical applications to support their operations, so the need for rapid, flexible software development is directly connected to business success. Application updates are more frequent than ever, change is continuous, and everyone expects tomorrow's functionality today.

A recent Morgan Stanley poll found that digital transformation is now the second-highest business tech spending priority, behind cloud computing.

This need to improve—and improve faster—has pushed the issue of software development outside the realm of the IT floor. “Much like cybersecurity over the past decade, we believe software development is emerging as a board-level discussion,” says Keith Weiss, head of Morgan Stanley’s U.S. software research team. “Business leaders increasingly recognize the close tie between how quickly a company can bring new software to market and their level of differentiation and competitiveness.”

In response, more companies are adopting new concepts such as agile development and DevOps—what Weiss and his team call “New Stack” software development methodologies—that drive higher developer productivity, more complete automation and, ultimately, faster software development.

In a recent report from Morgan Stanley Research, the U.S. software team forecasts that annual corporate spend in the sector could hit roughly $50 billion within the next three years—an impressive compound annual growth rate of more than 20%—and an attractive new theme for investors. 

Time for Change

A number of crucial factors underpin the outlook for broader adoption of the New Stack, as companies face growing pressure to deliver high-quality digital experiences amid fierce competition for eyeballs and wallet share.

“Today, customers have the ability to engage with brands at any time of day and from any location," says Weiss. “And increasingly, the costs of poor digital experiences are becoming more severe, both in terms of lost revenue and reputation.”

Surveys find that nearly half of potential customers don’t return to websites when they have problems with mobile access, and each minute of website downtime can cost the largest retailers $500,000 in lost revenues. A recent Morgan Stanley poll of Chief Information Officers found that digital transformation is now the second-highest tech spending priority for businesses, behind cloud computing.

Something Old, Something New

However, delivering these customer experiences using traditional approaches to software development is problematic. What could be called “Old Stack” development requires significant upfront planning, which has become too rigid, time-consuming and risky for the current era.

Old Stack technologies typically incorporated one or two updates a year and were built with a tightly integrated structure that limited the ability to make changes—because everything in the structure typically had to be changed at once.

In contrast, New Stack approaches, such as Agile development, DevOps and so-called microservices architectures, have modular structures that allow for rapid iterative change that can incorporate customer feedback more quickly. Incremental changes can be implemented without time-consuming, labor-intensive, large-scale “upgrades.”

A Shortage of Developers

These new approaches to software have another advantage: productivity. Current job statistics show that the demand for good software developers far outstrips supply. This puts a premium on New Stack applications that can be implemented using fewer developers—and that allow for upticks in customer usage without putting a corresponding strain on operations and support.

Companies that provide New Stack technologies could seize significant  growth opportunities. Research firm Gartner forecasts that 80% of IT organizations will adopt DevOps initiatives by 2021—up from 41% in 2017.

“A key inflection point has been reached," says Sanjit Singh, an equity analyst covering Enterprise Infrastructure and Business Analytics. “We see New Stack technologies as key beneficiaries, given the critical role they play in increasing development velocity, enhancing developer productivity and automating IT operations.”

Those numbers also mean that investment in the New Stack will likely surpass spending on maintaining older tech infrastructures by 2028.

Base Case: "New Stack" Spend Could Overtake Old Stack by 2028

Source: IDC, Morgan Stanley Research

Solutions to Unlock Productivity

Of the $22 billion current spend expected for the New Stack in 2018, the Morgan Stanley team believes that the biggest piece of the pie will go to so-called NoSQL Databases, which allow developers to build applications quickly, that is, without the rigidity inherent in previous database management systems.

Other important and attractive New Stack product areas include Performance Monitoring & Analytics, Developer Planning & Automation Tools, Integration Platform as a Service (iPasS) & Application Programming Interface (API) Management, Platform as a Service (PaaS) / Container as a Service (CaaS) Platforms, and Low Code Platforms. 

"New Stack" Spend to Reach $48+ Billion by 2022

Source: IDC, Morgan Stanley Research

To be sure, changes elsewhere could soften some of these opportunities. As public cloud computing environments assume a bigger share of corporate workloads, for instance, they could crowd out opportunities for New Stack companies by offering their own suite of tools, which might make third-party offerings less attractive. A rise in so-called serverless computing could also pose challenges.

But the efficiencies already on offer from New Stack companies are appealing: accelerated software delivery, reduced downtime, enhanced automation and greater flexibility in scaling resources down or up.

“In the coming years, New Stack technology will likely play a key role in helping bend the operational cost curve and freeing up resources for companies to invest aggressively in their digital initiatives," says Singh. “We see strong adoption of these technologies ahead."

For more Morgan Stanley Research on the future of software, ask your Morgan Stanley representative or Financial Advisor for the full report, "A New Software Stack for the Digital Era" (May 23, 2019). Plus, more Ideas from Morgan Stanley's thought leaders.