How API-based SaaS is redefining software

Interview with Markus Suomi about why API adoption is accelerating now, how APIs are disrupting the way large corporations operate, and the implications of API adoption on the larger economy.

Over the past year or so, the NGP Capital team has invested in companies where APIs are a critical part of their products, like Shippeo and Coda. In this article, we dive deeper into the world of APIs with Markus Suomi, our Executive in Residence, and discuss why API adoption is accelerating now, how APIs are disrupting the way large corporations operate, and the implications of API adoption on the larger economy.

What is an API and what does “API-fication” refer to?

An API is an application programming interface, essentially a software module constructed with an interface that allows other software to integrate with it. With APIs, software functionality becomes like Lego bricks – stacking software modules together becomes easy, enabling you to quickly build new software solutions. APIs allow you to effortlessly continue to develop your solution by adding, changing, or removing bricks. This gives you much more agility and productivity than traditional, monolithic applications have provided. APIs are as old as computing, so there is nothing new about the API as a concept. What is interesting are recent advances that are giving APIs a more powerful role.

What are the latest trends in the API and “API-fication” space?

“API-fication” refers to a trend that really got going around five years ago. It is basically the confluence of a few different trends. The first of these trends is the increasingly important role of software. This trend might seem obvious in the VC sector, but many corporations have not yet fully embraced the possibilities of the digital world. However, the shift to a software focus has been accelerating. Just 10-15 years ago, software was something an IT department dealt with in the back office. Today, we all interact with software daily, for example, when shopping or using banking services. Software is at the forefront of everything we do, as well as of most businesses' processes, products, and services. The whole “Digital Transformation” discussion is really all about software adoption.

The second trend is the role of cloud computing. First, companies learned to use IT infrastructure and software outside of their own data centers. Then SaaS came along, making it possible for companies to use sophisticated software applications that they did not have to deploy or maintain. Scaling has become easy and transparent, and the pricing is usually simple.

In parallel with this, API tools were developing, making it significantly easier to develop and consume APIs.

As all of these trends came together, suddenly companies were able to build their software in a much more modular way – each Lego brick worked well with other Lego bricks, and everything integrated together. In addition, the growing demand for APIs is fueling growth in supply, with an ever-increasing selection of different kinds of Lego bricks being offered by API-first SaaS companies.

That is the high-level perspective on how we have gotten to where we are today. API-fication is still a relatively new phenomenon and a relatively small part of our economy, but we can expect a lot more to happen on this front in the coming years.

Why is API adoption accelerating now?

APIs remove a huge amount of friction, which is an economic factor on both a micro and a macro level. APIs affect how a company can be organized internally. They enable companies to experiment and iterate on their business models faster. They improve team collaboration and minimise the friction that can come from workforce coordination and learning customer needs. They allow corporations to figure out what to build internally and what to buy externally, which is a huge economic factor.

APIs also enable companies to scale their technologies a lot faster. If a team builds a great technology for internal use, they can publish an API for that technology, enabling it to scale within the company and get rapid process adoption. The most well-known example is probably Amazon Web Services, which was a result of a mandate to publish APIs that others could use, reducing the need for coordination. There are other companies that have done this as well, for example, Ant Financial, which has published all of their foundational business capabilities as APIs. The internal impact of API adoption within companies is significant.

How will this change how large corporations and global enterprises operate?

My sense is that large corporations playing in areas that are being disrupted by modular software and APIs will have to restructure their organizations and talent to adapt to this era of software-driven innovation. Otherwise, unless they operate in highly regulated environments, they will have a hard time from a competitive perspective. Of course, there are opportunities for large corporations as well, if they can transform their culture, talent, and IT architecture to embrace API-fication.

30 years ago, it was good to be a large corporation – economies of scale enabled you to invest in assets, creating a competitive advantage for yourself. The internet and the ongoing software revolution changed the rules of the game significantly, and incumbents have been disrupted across numerous industries. The API-fication trend is accelerating this change. It is easier than ever before to build and scale business capabilities, without heavy investment or the need to create economies of scale. Now any company can simply acquire business capabilities through APIs.

Let’s take retail as an example. Anyone can set up an online shop using Shopify, accepting payments through Stripe, providing customer service through APIs, selling and marketing through Facebook, and shipping through a logistics provider that offers APIs. Because of APIs, all of these capabilities can be integrated so that they look seamless to the customer while optimizing internal efficiencies at the same time. It can all be built very quickly, starting from scratch, and paying for the usage of API services. This means that start-ups can grab business niches in a way that was simply not possible before. It also means that companies can experiment with new business models even faster. The basis of competition in many arenas is shifting to software, data, and talent.

What does this mean from a workforce and talent perspective; what will be in demand going forward?

There are two sides to this coin. On the API consumer side, I think the minimum hurdle for technical talent will decrease. The best API products provide an outstanding developer experience with tutorials and training and whatnot, making them very easy to consume, so the talent requirements for using them go down. Just think about how easy it is to adopt a new SaaS application today compared to how it was prior to SaaS. The same is now happening with APIs.

On the other side, for API-first SaaS businesses, the situation is very different, because this is where all the complexities lie. In the end, an API is essentially an abstraction layer that tries to make the consumption of the underlying software functionality simple. Companies that produce APIs are deeply technical and will continue to require very high domain expertise and technical knowledge.

Where do you think APIs are moving the world?

Many of us, as consumers, are spending more and more of our money on digital products and services rather than physical products. In addition, many of our physical activities and products now also have digital components. These trends are likely to increase over time. For example, our cars stand idle most of the time and are underutilized, which has led to software that enables efficiencies like carsharing services and other ways of increasing the utilization rate of physical products like cars. These products and components will become more efficient through digital services, and digital services will be built on APIs.

At the same time, APIs allow us to rethink the “theory of the firm” – the nature and structure of a company – including how the company is organized internally and the boundaries between the company and the market. With APIs radically reducing transaction costs between businesses, we can make a case for a major paradigm shift in how businesses are built and organized. We have already seen the impact on startups. Established industries and companies should soon follow.

Markus Suomi has more than 25 years of experience in the technology sector, having held senior leadership (CEO, CTO) roles in big corporations and medium-sized enterprises, as well as in startups. He has experience managing software teams of up to 1,500 people across the US, Asia, and Europe. Most recently, he served as CTO of Tieto, a Nordic IT services and software company.