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How APIs Drive Company Performance

bkirschner
Nov 04, 2016

Here’s a new way to explain what “API” stands for: “a profit increase.”

Initial findings from groundbreaking research reveal that the amount of data that flows through an organization’s modern web APIs is positively and significantly associated with sales, net income, and market capitalization.

This shouldn’t come as a shock. Digital transactions, whether with Amazon or Netflix, Walgreens or the BBC, are powered by APIs. Visualizations by The Center for Global Enterprise enable us to literally see the scale of today’s public “API economy.”

But why have we been working with economists to create empirical quantitative benchmarks—and what does it mean to you?

Correlating digital leadership and competitive advantage

Our research agenda has always focused on helping our customers achieve more business impact, faster, while also accelerating growth of the overall API ecosystem.

We saw a need for new tools in the toolbox to drive change quickly as digital transformation was increasingly a priority in boardrooms and C-suites.

As recently as three years ago, simply meeting customer expectations for modern mobile apps motivated a lot of the interest in APIs at large companies.

While this was (and still is) important, we knew from our interactions with first-movers and visionaries that APIs were a vital part of bigger changes in business models.

So we invested in a program of survey research that did two things. It confirmed our hypothesis that companies with stronger digital capabilities were outperforming their weaker peers on business outcomes like revenue and profit. And it uncovered best practices for building and exploiting those capabilities.

We’ve since found ourselves in great company, with empirical research conducted by experts from the MIT Center for Digital Business and Harvard Business School also validating the connection between digital leadership and competitive advantage.

The time to sit on the sidelines is over

The days when a small, passionate mobile team might lack evidence to convince top management that APIs are more broadly relevant to competitiveness are behind us.

Today’s balance of risk is different. As boards and CEOs wrestle with digital transformation, the urgency of “getting in the game” of doing business with APIs might get lost in a larger change initiative that, for most, will take years to fully unfold.

We know from our customers that leaders learn by doing, accelerate growth by firing up an ecosystem, and discover more mash-up opportunities by having more APIs in play. Sitting on the sidelines leads to disadvantage, in both insight and assets.

Walgreens built their PhotoPrints API for their own app. Now more than 100 third-party apps generate revenue shared between Walgreens and its ecosystem.  TicketMaster’s CTO describes the company’s API as growing over four years “from a $1MM/year business to a $1B/year business.” Some of our own engineers built an app that makes Philips Hue light bulbs and Uber better together, thanks to APIs.

Data flow as a KPI

Marshal Van Alstyne was one of the pioneers in describing the economics of how and why harnessing external innovation and user-created value beats traditional supply chains. As a co-author of Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, he is also deeply immersed in explaining how APIs further change the basis of competition.

Our research collaboration enabled Marshall and his team to map API usage data from the hundreds of billions of API calls that cross the Apigee cloud to financial information on public companies. Together we were able to benchmark the financial impact of APIs not at one or two or ten companies, but across more than 100. Getting great at creating and capturing value with APIs may absolutely entail all the organizational changes, large and small, subsumed under the phrase “digital transformation.”  And that may entail a one- to three-year journey.

But data flow through modern web APIs is a key performance indicator (KPI) that cuts through all the complexity of organizational change to track progress toward a stronger bottom line. It is a lever for driving alignment and momentum.  

Download the MIT and Boston University study, “The Role of APIs in Firm Performance.

"The Role of APIs in Firm Performance"—FAQ

What did this research find?

  • API adoption leads to increased profitability in the short and long run.
  • The volume of data passing through a firm’s APIs predicts how much.
  • An open developer portal further enhances the gains from API adoption.

How was this research conducted?

Data from hundreds of billions of API calls that passed through Apigee’s cloud-based API management platform was married to financial data from public companies. The technical methods were an event study and “difference in difference.” In practical terms, this means firm performance was analyzed before and after API traffic and across firms with and without API traffic. All reporting is at an aggregated, anonymized level.

Why is this report full of a lot of complex math? Will there be further reports or slide presentations?

The core of this research is being conducted to a peer-reviewed standard. As we move forward, we will complement the rigorous econometrics at its foundation with practitioner interviews and content for business decisionmakers.

The report says: “For a firm of 13,500 employees, our preferred specification implies API adoption increases yearly net income by more that $250,000.” Why such a small number for such a large company?

This is the result of a regression analysis in which using APIs and the volume of data passing through those APIs predicts net income. In other words, as more data passes through APIs, the dollar figure will go up. For every firm, the dataset used in the analysis starts at the first month they have any API traffic at all. This point estimate reflects the average across periods when APIs' impact is undetectable (for example, the first month they launched) as well as periods where the impact is very large.

Why would data passing through APIs rather than API calls be associated with revenue and profit?

APIs may be designed to deliver larger or smaller payloads per call. But data is the bottom line as a measure of value exchange. It is a better measure of purchase, recommendations, or pieces of content moving between producers and consumers.

What’s next? Can I participate?

We will continue this analysis, conducting a survey, and conducting practitioner interviews, all with the goal of creating richer benchmarks to inform decision makers. Email the subject line “Participate” to institute@apigee.com to opt-in to receive more information. Or if you want to talk about it, let me know at bkirschner@apigee.com.

For more on the new research report, read the CIO.com article, "How API Adoption Boosts Annual Profits."

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