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APIs Aren’t Just for Tech Companies – Harvard Business Review

Application programming interfaces — more commonly known as APIs — are at the heart of the most successful digital companies, powering everything from Amazon’s cloud business to Google ads to Facebook likes. APIs enable mobile experiences, connect companies on the web, and enable platform business models. The idea of an “API economy,” in which APIs create new value for companies, is over a decade old, and many established enterprises correctly view APIs as a key to unlocking their digital transformations. But it’s not just the digital giants that can benefit from APIs.

While we’re firmly living in the digital age, companies whose success predated the web have struggled to adapt to the digital business paradigm, a fact underlined by the urgent need for digital transformation brought about by the Covid-19 pandemic. These companies were designed for pre-web business, and their leaders’ mental models exist within those structures. To digitally transform their businesses, leaders need to transform their own mindsets to lead digital organizations.

Jeff Lawson, CEO and co-founder of Twilio, recently wrote about the importance of embracing software delivery as a core competency for every business. This is certainly true, but at the same time, it won’t be enough for, say, a logistics company to start shipping code instead of shipping freight. Leaders need to learn how to build digital solutions, but more importantly, they need to ensure they’re building the right ones.

Twilio itself presents an interesting case. Born in the wake of Apple’s iPhone and App Store launches, they struck digital gold by focusing on a very specific need: App developers’ need to take advantage of a smartphone’s carrier services like voice, text, and billing. They’ve since achieved unicorn status, gone public, and even recently made a $3.2 billion acquisition. The core products that met this demand and fueled this growth were web APIs.

You don’t have to be a tech company to reap the benefits of APIs — the opportunity exists in every industry. Some sectors are being compelled to offer APIs due to regulation (like healthcare and banking), whereas others are prompted by industry interoperability (like telecommunications) or disruption (like retail, media, and entertainment).

A transformation toward APIs would particularly benefit small to midsize companies that now struggle to reach digital audiences through saturated and tightly controlled ad networks and ecommerce markets. APIs would position them to more easily offer products and services through emerging platforms, unbundle and re-bundle their core competencies, and offload non-core competencies to third-party providers (like Lyft’s use of Google Maps, Stripe, Twilio, and Amazon Web Services).

Any business with a website or mobile app already has much of what’s needed to offer APIs, but it’s not enough to arbitrarily open up APIs to the web. Companies that have been most successful with APIs display common thinking patterns and practices, something we call the “ways of the API.” Following are three of the most impactful of these patterns.

The Unbundling Way: Dismantling and Rebuilding Business Capabilities Through APIs

Jeff Bezos published a corporate edict around 2002 mandating that from that point forward, all product teams were required to expose their data and functionality through APIs. Not only that, he insisted that teams were only allowed to communicate with each other through these APIs. It was an extreme step intended to promote team autonomy and product agility. It was a few years before the mandate took hold, but it created an unprecedented platform for growth. As a result of the mandate, Amazon decomposed its internal infrastructure-provisioning services through web-friendly interfaces and was able to launch what is now its most profitable business unit: AWS.

Unbundling software functionality into API-accessible business capabilities is a hallmark of leading digital companies. They then re-bundle these capabilities to extend their reach or open up new customer segments. APIs helped Netflix achieve screen ubiquity and accelerated Uber’s move into food delivery. But non-tech companies wanting to move at the pace of digital business also need to follow the “unbundling way of the API.” For example, when the pandemic hit Australia, New South Wales Health Pathology was able to stand up testing infrastructure within two weeks to support hundreds of thousands of tests and communicate their results thanks in large part to their already unbundled, API-enabled software services.

The Outside-In Way: Designing and Developing with the API Consumers in Mind

Stripe entered a crowded payments market in 2010. Identifying mobile app developers as an underserved customer segment, Stripe focused on delivering the most useful and usable APIs possible. It worked. Stripe has close to 20% of the online payments market share (a number that’s growing), and the company is valued at over $100 billion. One of the pillars of their success has been an unwavering commitment to designing their products outside-in from the consumer’s perspective. In other words, they put themselves in their consumers’ (in this case, the developers’) shoes, then created intuitive, efficient interfaces for developers building apps that use the API, and provided documentation and tools to support them.

Many fast-growing companies can overload their consumers with too many product features as they bring new ones to the market. Stripe has avoided this problem by continually evolving its API products to streamline the developer experience. This “jobs-to-be-done” thinking is another important characteristic of how successful digital companies use APIs. A non-tech company that applied this approach is Pilot Flying J, a North American truck stop chain. By digitizing capabilities such as shower reservations, parking availability, and prepaid fueling through APIs, they allowed mobile app developers to quickly and conveniently package these services for their customers — truck drivers. To build loyalty with the developers who will build the applications that provide the digital touchpoints for their customers, companies must follow this “outside-in way of the API.”

The Ecosystem Way: Cultivating a Digital Ecosystem with APIs

Twilio invented a new business model for the app economy. Recognizing that app developers would want low-friction services and global coverage, Twilio became a retailer for the carriers’ wholesale APIs. Where did that recognition come from?

Borrowing another Clayton Christensen concept, Twilio envisioned the “value network” for mobile applications, the digital ecosystem within which apps would exist. By looking at the various stakeholders (app users, app developers, third-party service providers) and the value exchanges between them, Twilio identified a gap that could be filled — combining and accelerating carrier services — to the benefit of all ecosystem members. Twilio helped put useful services in apps for app users, sped up delivery time for developers, and drove higher consumption for carrier services.

Digital innovators use ecosystem thinking to chart strategies for sustainable growth and use APIs as conduits for value exchange within the value network. Companies that want to stay adaptable enough to survive and thrive in the digital economy should embrace this “ecosystem way of the API.” For example, Airbus recognized an issue in the aviation industry where critical flight and operational data was locked away in siloes. Being a supplier to most airlines and thus having strong relationships across the ecosystem, Airbus launched an API-enabled data platform called Skywise to help the airlines reduce maintenance issues and prevent technical delays.

A Heavy Lift, but Not Necessarily a Costly One

A mental model is one of the hardest things for a leader to change, but it doesn’t have to be the most expensive. IDC projects that organizations will spend $6.8 trillion on digital transformation between 2020 and 2023. Large enterprises funding transformational programs can align their already budgeted spending with these new approaches.

Companies in industries where API-related regulations and standards are being implemented (PSD2 in financial services, FHIR in healthcare, TM Forum Open APIs in telecommunications) can use their compliance initiatives to strategic advantage. Smaller companies, whose customer and product focus is more specialized, could have an agility advantage in unbundling their capabilities, designing for their consumers, and exploiting opportunities in their respective ecosystems. The beauty of working with digital building blocks is that you don’t have to demolish the old factory and build a new one.

The best way to get started with APIs and API thinking is to start small and iterate. Form a small, cross-functional team of business and technology experts. Use the outside-in way to analyze customer experiences and identify digital opportunities. Use the ecosystem way to define target business models and external dependencies. Finally, use the unbundling way to define the API-enabled capabilities and infrastructure required to deliver innovative solutions. Measure, apply learning, and repeat. This approach can allow the organization to innovate with low risk and low net cost. The seed investment required would be funding for the team, plus money for API-specific infrastructure. This could likely be found in existing digital transformation budgets. Spending can scale up in alignment with delivered business value, protecting the organization from making too big of a bet too soon.

A lot of work is required to naturalize an established company for the digital economy. But all that work will be in vain if the thinking doesn’t change first. APIs are building blocks for digital transformation, but determining which APIs to develop and what products and solutions they’ll enable requires a digital mindset. Digital pioneers have created a template for success. Adherent organizations must pay attention to the how and why in addition to the what.