Digital Procurement Transformation and Diminishing Returns

Digitization vs. Digitalization vs. Digital Transformation

In our earlier posts, we covered the notions of digitization and digitalization. We can add the digital transformation to this logical sequence as follows. 


So, if we plan to conduct digital transformation, it's OK to consider digitization as the first step, i.e., digitizing legacy processes and automating manual labor and paper-based activities.

We may employ the law of diminishing marginal returns to decide whether to shift to digitalization and digital transformation.

Diminishing marginal returns

It is an economic phenomenon that assumes that the incremental output or benefits derived from an additional input unit decrease as the quantity of that input increases while holding all other inputs constant. This concept is often observed in production and investment scenarios.

Here’s an example to illustrate:

Imagine a factory producing widgets. Initially, as the factory hires more workers, the production of widgets increases significantly because many tasks can be done more efficiently with more hands. However, as the factory continues to hire additional workers, each new worker contributes less and less to the overall production. This happens because the most efficient production capacity has already been utilized, and additional workers might start to get in each other's way or run out of equipment to use, leading to a decline in the productivity of each additional worker.

Boosting Benefits of Digital Procurement by Transformation

Similarly, in every step of the transformation project, we will reach the point where incremental benefits of digital procurement will start slowing (if not disappearing) with new enhancements and investments. That means the potential of extensive development has reached its limit, and we need to look for efficiency boosts with an intensive approach, i.e., shifting over to the next stage - digitalization or digital transformation, to unlock the benefits of process or business model improvements.  

Therefore, we may expect the impact of digital procurement on benefits to look somewhat similar to the following graph.

Value Of Delivery Boost: Progression Vs. Stagnation

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