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Stop Before You Sell: A Warning to DSOs

Dentistry is hot: it’s the dot com of the decade. Investors see huge opportunities, and they’re pouring into dentistry — but these new investors are causing a problem: they see dentistry as a commodity, not a service business. This view will have significant costs for dentists, patients, and existing DSOs.

The pathway to success from a strictly commodity viewpoint is straightforward: consolidate; increase efficiencies; drive hard with data; increase hourly production per operatory, get rid of unjustifiable expenses; grow the multiple; then flip or refinance when the time is right. You hear the same mantra from these new players: “It’s such a fragmented industry — it has strong and consistent profit margins; the industry has never lost money; supply is limited, demand is high; dentistry has an ever-expanding market — let’s jump in!”

But bringing a commodity-only mindset is toxic. A commodity is a thing — something tangible, something reproducible; the “same thing that can be found in every store.” The same thing can be found in California or New Hampshire. You can get the same washing machine at Home Depot or Sears. You can get the same root canal in Maine or in Nebraska. But the relationships that occur within a strict commodity context are not being considered.

You’re not “served” in a commodity context; you’re “sold.” The relationship in a commodity context is a sales relationship, and relationships with salespeople usually lack trust, affinity, and allegiance. That’s why customers ask for warranties or guarantees. They don’t have trust in a salesperson — the customer knows they’re the “mark.” They know the salesman’s primary motive is to sell to them. In a service context, it is about taking care of the person, not about selling the person. It’s no wonder people love Amazon — there’s no salesperson involved.

DSOs: Service vs. Commodity

In a commodity business, the person behaves like a consumer. There’s a big difference in the operating principles and behavior between a consumer and a patient. As a patient, you’re seeking partnership. As a consumer, you’re seeking protection.

Now add to this equation the deep fear running through dentists and practice-owners. They now see that DSOs are the “writing on the wall.” DSOs are proliferating; they have money, structure, power, and people. DSOs are beginning to take over the field. Scared and threatened, and tempted by dollar signs, dentists are primed to sell. The problem is they are selling to the highest bidder, not the right bidder. Smaller DSOs trying to grow by acquisition, DSOs who are service- and quality-oriented, are getting outbid by new investors who just want to “roll it up.”

For dentists who sell, the appeal of the cash windfall will wear off — it always does. These dentists and their direct support staff will become disgruntled and in many cases resentful over time. Dentists are geared to be service providers, not commodity agents.

Morale will sink, performance will diminish. New investors will try to whip the practice harder as results decline, which will make things worse. Patients will begin to complain and leave, patient and staff complaints will skyrocket and speed up the decline rate. Ultimately, their failures will stain all DSOs.

Dentistry is a service business — the service it provides is dental care to patients, which is delivered in several different ways: repair, replace, and prevent. Until now, DSOs have been committed to the delivery of quality dental care to their patients. Structures were built; quality-assurance programs developed; dental directors hired; feedback loops created; compliance measures established. With service replaced by commodity at the core of practices, the quality of dentistry will suffer. Poor quality leads to a whole mess of trouble.

DSO Solutions

I suggest the current DSOs begin to take a look at educating dentists who are considering selling to bodacious equity investors, singing their songs of wealth and no management worries. I suggest that dentist-owners being courted by these investors seeking short-term gains participate in a well-designed program so these dentists can begin to understand the risks, benefits, and costs — as well as how to evaluate investor offers. Let’s prevent failure rather than react to it.

The failure rate of commodity-centric DSOs run by investors with minimal dentist ownership and leadership is high. They will fail because dentistry is a service business, not a commodity business. And their failure will be failures for all DSOs.

 

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