Software continues to eat the world.
In the second quarter of 2019, the five most valuable global companies were all software-centered: Microsoft, Amazon, Apple, Google (Alphabet) and Facebook. For global organizations to survive in the age of everything-as-a-service, there is a desperate need to go digital. According to a recent survey, 97% of organizations have started or are launching digital transformation initiatives. However, many companies are still struggling with how to get started.
One of the ingredients in the success of the digital giants has been the use of web APIs. Amazon’s move to an API-centric architecture paved the road to its launch of AWS, which now contributes multi-billion dollars of annual revenue. APIs power the apps in Apple’s App Store, many of which embed third-party APIs such as Google Maps. Facebook’s “like” and “share” functions — fundamental to its growth — are linked to third-party sites and apps through the use of APIs. The term “API economy” has even gained popularity as a way of referring to the business impact of APIs.
As Amazon, Google and Facebook have proved, APIs are critical building blocks for innovation today. Organizations that build and treat their APIs as externalizable products — something that 43% of organizations say they are already doing — will be set up to win. But what does “treating APIs as products” really mean? Before diving into API products, it is first helpful to take a deeper look at digital products in general.
Digital Products and the Digital Supply Chain
Social networks, video games and smartwatches can all be categorized as digital products. Even though they take on many different forms, it is their underlying software that provides their differentiating value. It is not surprising, then, that many organizations focus their digital product management practices on the relatively mature field of software engineering — especially the Agile and Lean schools of thought. However, there is another product-centered management field that is equally important when moving to the digital economy.
“Products”— things that are produced — were central to the industrial economy of the 20th century. At the culmination of this period, supply chain management arose as a key discipline for organizations producing physical goods, helping them minimize production costs and delays. The typical supply chain consists of five phases that illustrate the lifecycle of a product, from its raw materials to its consumption by customers:
The sequential, terminal nature of this supply chain has informed the development and delivery mentality of many successful product organizations. When organizations started developing digital products, their approach to production followed suit. This is why the waterfall methodology for software projects — long, sequential phases of requirements gathering, design, construction, testing, and implementation — took hold in the enterprise and remains entrenched in many companies to this day.
Likewise, we can visualize a “digital supply chain” that captures the five phases of digital product delivery. Each of these phases correspond to a phase in the industrial supply chain:
Despite the analogous phases in the digital and industrial supply chains, there are fundamental differences within each phase:
|Discovery||Digital parts and materials — data, services, code — are discovered and immediately available for integration into digital products…
…unlike the often painstaking process of sourcing physical materials and parts
|Development||Digital products are developed through a process of building new components, modifying old ones, and integrating the discovered parts…
…unlike the assembly line used in manufacturing
|Deployment||Digital products are deployed to production environments almost instantly…
…unlike the costly and complex logistical processes needed to distribute physical products
|Registration||Digital products are accessed upon customer registration, sometimes even before any payment is made…
…unlike physical products that must be in the possession of the customer post-sale
|Experience||Digital products are experienced, often repeatedly, and often in a changed and enhanced way…
…unlike physical products that are often consumed without improvement until they are used up or depreciated
These key differences illustrate why a different approach is needed to manage the digital supply chain versus its industrial predecessor. Whereas material sourcing and distribution for physical products often requires expensive and time-consuming processes, digital parts — data, services, and code — are instantly accessible, and digital distribution is immediate and replicable. Furthermore, whereas physical products are immutable once distributed, digital products are malleable even after they are in the hands of consumers. Finally, whereas parts used in physical manufacturing are constrained by the fact that they must be contained within the resulting product, the fractal nature of software means that digital products can be assembled using parts with unbounded capability and complexity. These differences shift the perspective of supply chain management in the digital economy from internal to external.
Optimizing the Digital Supply Chain
In the industrial economy, the biggest barriers in the supply chain were often the time and cost associated with activities outside a product company’s direct control: obtaining source materials and parts from suppliers, and getting products to market through distributors. Some organizations overcame these barriers by taking ownership of their supply chains end-to-end. For example, industrial pioneer Ford set up dealer networks and even built its own rubber plantations to expedite tire production. Given the drastic reduction in time and cost needed to obtain digital parts and materials, it is no longer a winning strategy to own the entire supply chain.
Instead, organizations creating digital products have a new opportunity to differentiate themselves by focusing on the two endpoints of the digital supply chain: discovery and experience. First, they can optimize their ability to discover and integrate digital “parts” from within the organization or externally. Second, they can optimize the user experience for their digital products.
Although digital production starts with discovery of digital parts, the most successful digital companies are driving their product designs from the other end of the supply chain: through the customer experience. This shift in focus from the supply side to the needs of the user provides the biggest opportunity for companies in their digital transformations. According to McKinsey, successful digital organizations “require a complete focus on the user experience through design thinking and digitization/automation.” So how can APIs help organizations optimize their digital supply chain in this way?
Unbundling and Re-bundling with APIs
Whereas the industrial supply chain flowed in one direction, the digital supply chain works best as an omnidirectional set of interconnected business capabilities. Today’s digital enterprises have the opportunity to utilize and market their own core competencies while exploiting the specializations of third parties more easily than ever before. These modular capabilities can be composed in many ways, offering new customer experiences, products and even platforms. Instead of optimizing the static supply chain for a fixed product as Ford did years ago, companies in the digital economy must learn to operate within a much more variable supply chain. To reap the benefits of the digital economy, companies are packaging their reusable parts as products, and then offering those same parts to third parties in order to build new value chains.
But before these products can be bundled or offered externally, companies first need to unbundle their technology building blocks to make them easily accessible and reusable. The best way to unbundle business capabilities is through APIs.
Imagine if Uber or Lyft had to build their own geolocation services in order to get their startups off the ground. Imagine if Instagram or Netflix had to provision all the infrastructure required to support their meteoric growth. It’s unlikely any of these startups would have succeeded with such a steep ramp. However, using the APIs of Google Maps and AWS respectively, they were able to enter the market quickly and disrupt entire industries. Accelerating the discovery phase of their digital supply chain allowed them to focus on reimagining and enhancing the customer experience. Meanwhile, Google and Amazon reaped the benefits of this additional usage. Companies that offer their business capabilities through APIs are in the best position not only to survive disruption but also to thrive in the hyper-specialized climate of the digital economy.
Cultivating an API Ecosystem
APIs factor into every phase of the digital supply chain, as illustrated below:
The most successful companies in the API economy are those that recognize the importance of the ecosystem that sustains their API products. The digital supply chain helps to identify the key elements in this ecosystem: partners who provide APIs used to build composite API products, internal teams that integrate and assemble those products, directories and marketplaces where the API products can be discovered, developers who build applications that use the API products, and the customers who benefit from the business capabilities exposed through APIs.
Proactively cultivating an API ecosystem is a big part of managing APIs as digital products. To maximize the business value of their APIs, organizations should support all aspects of the ecosystem. To take advantage of other API providers’ core competencies, organizations should explore third party collaboration opportunities for digital products. To increase velocity and agility, they may need to redefine the principles and practices of their software delivery. Driving API adoption requires a focus on developer productivity and the cultivation of developer communities. To fully exploit the business opportunities presented by digital products, organizations must reimagine customer experiences and the APIs that empower them.
There are already established enterprises making digital strides using this API ecosystem approach. To address the shifting preferences of their customers, McDonald’s accelerated their move into food delivery by partnering with Uber Eats, connected through Uber’s APIs. Unilever used an API-based delivery approach to provide a cross-brand operating model and speed up their project delivery. Today, deployment for new initiatives is 3-4 times faster — dropping from months to days. In the transportation industry, Hertz has cultivated a community of new developers coming out of Florida’s large post-secondary student population. Success stories using this API ecosystem-oriented approach to digital transformation are increasing in number across all industries.
Digital transformation involves much more than changing technologies. To thrive in the digital age, established enterprises must change the way they operate and even the way they think. Understanding the transition from the original industrial supply chain to today’s digital supply chain can help organizations optimize the delivery of their core business capabilities through digital products. APIs are foundational to this winning strategy. By producing and managing APIs as digital products, and by sustaining an ecosystem for those APIs, enterprises can unbundle and re-bundle their business capabilities in a way that will dynamically meet the needs of the ever-evolving digital economy.
Thanks to Stephen Fishman for his contributions to this article.
Feature image via Pixabay.