A Look to the Future: How DSOs Are Changing the Landscape

By November 7, 2018Strategy

The figure above shows two curves. One is the adoption curve in black, which is a proven model that describes the adoption or acceptance of a new product or innovation. In this case, the product is Dental Service Organizations, or DSOs. The process of adoption over time is a classic “bell curve.” The model indicates that the first group of people to use a new product is called “innovators,” followed by the “early adopters.” Next comes the “early majority” and “late majority,” and the last group to eventually adopt a product are called “laggards,” or sometimes “phobics.” The heavy red line in the figure shows the “tipping point.”

Where is the Tipping Point?

Malcolm Gladwell defines the tipping point as “the moment of critical mass, the threshold, the boiling point.” The tipping point describes the moment a market shifts; where ideas, products, messages, and behaviors spread as viruses and move into broad acceptance. The tipping point occurs between 15 percent and 18 percent of market share. The black dot represents where DSOs are today in the market share of dental practices: just on the verge of moving into the early majority. At early majority, it has become what everyone knows — DSOs are now fully accepted as the future of dental delivery.

When you cross into the early majority, it is the height of entrepreneurial activity in any industry. Everybody wants to play. Many different forms are generated. Can you remember when “dot coms” passed the tipping point? Or cell phones, or flat-screen TVs? Lots of players and money enter the market. The metaphor is the “Wild West” — and the gold rush is on. As you move forward along the adoption curve toward the late majority, a few things always happen.

Looking Ahead

First, the number of companies gets smaller and smaller, and some other companies get larger and larger. In the case of DSOs, the ones that get larger will be the ones that can effectively scale, recruit and retain staff and doctors, have strong capital support, have an ascendable infrastructure, and have a continuous expansion of market share along with strong revenue growth and healthy profit. The grey curve represents the Business Development curve. As we move forward toward the late majority, note the continuous height increase on the Business Development curve. What happens during this upward swing of the Business Development curve is that M & A (merger and acquisition) activity increases on a larger scale. The higher the Business Development curve, the greater the M & A activity, the fewer smaller entities exit, and the greater the expansion of the larger enterprises. The mid-sized and larger entities at this point grow by buying the smaller ones.

If we use Google or Microsoft as an example, they buy the smaller IT and AI companies because they have the infrastructure, executive talent, market share, brand,  and — most importantly — the capital to engulf these smaller entities and grow them at a much higher velocity than they could by themselves. Amazon, Comcast, and Netflix are also leaders in this domain. On the bottom of the figure is my forecast for when this will happen for DSOs. I might be wrong, but then again, I could be right. This is just how I see it. And, given all the impending forces — AI, cloud computing, demand for integration with medicine, blockchain, hybrid capitation reimbursement based on outcomes and value, a flood of venture capital, a shift in the mindset of new dentists, dental therapists, new preventative therapies — from my particular view of dentistry, all these forces will be wind in the sails for greater M & A activity, fueling DSO expansion.

How to Take Action

My advice for those now engaged in building DSOs? Go forward with alacrity. Build your enterprise to $25 to $50 million, and then be ready to partner or be acquired by a larger DSO. The opportunities for smaller DSOs at these $25-$50 million dollar revenue levels, in my view, are incredible. Getting to the $25 to $50 million is a very hard climb, but will be well worth the struggle. Solo practices will become less and less attractive to the market, which will continue to push their asset value downward. Solo practices will not be able to keep pace with DSOs. They will lose their ability to recruit new dentists and staff. Solo practices will not be able to keep up with technology as it gets more and more expensive in terms of time and money. Their market share will continue to shrink.

But what should solo practices do? That is a whole other story, and not the focus of this article. But the further dental practice moves toward DSOs on the business curve, and the further it occupies the late majority on the adoption curve, the fewer opportunities will exist for solo practices. The future is crystal clear: DSOs will dominate the industry.

According to my calculations, somewhere between 2025 and 2035, DSOs will be 80 percent of dental practices, not only in this country, but in all first world countries. DSOs are certainly the future. There will be a half-dozen to a dozen very large players, but regional DSOs, partnered with these larger entities, appear to be in the lead. Know-how, capital, executive talent, and resources contributed by the larger entities to regional DSOs will powerfully support their growth and prosperity without a significant loss of local authority.