DSOPro

The Key to Strategic Management is Targeting Effectiveness over Efficiency

DSOPro: Tell us about your background.

My first career was as a dentist. I built up a group, which I then exited to a larger DSO. I got into dentistry in a roundabout way. I never wanted to be a dentist. I wanted to be an archeologist. I was going to travel around the world, like Indiana Jones, trying to find golden idols. But my parents gave me a choice of one of three jobs—becoming a doctor, lawyer, or engineer. That’s how I found myself going into dentistry, with no real intention behind it. I was lucky enough to have been successful growing and scaling my group.


DSOPro: How long did you practice dentistry?

It took me 17 or so years to get out of clinical dentistry. I really struggled to exit. I got to a point where I was slowly whittling it down from full time to three days to one day a week to twice a month, to one day a month. So, it was a slow process. I finally exited clinical dentistry in 2017.

I cut my teeth in the corporate world when I went to work for a multinational corporation in a quality management systems manager capacity. It was a large organization called Aspen Medical International, which provides a full scope of health services—dentistry, surgery, aeromedical evacuations, outbreak control, radiology, pharmacy, primary care, intensive care—you name it, they do it. I was responsible for building and systematizing their processes in compliance with the ISO 9001 quality management system standard and getting that certified through various international bodies around the world. They have had operations in Australia, Sierra Leone, the United Kingdom, Germany, New Zealand, Canada, and the United States. 


I’ve found that once people learn that you are a clinician, you tend to get pigeonholed in that role. No one really wants to give you an opportunity to leave clinical dentistry. You always get pulled back into it. So, I had dual roles when I worked with Aspen Medical. One was as their quality management systems manager, and the other as their senior dental officer. I was responsible for the dental operations, as well as the broader organization-wide management system development and certification. Whether it was dental, administrative, supply chain, etc., I was responsible for the systematization of that department. We were doing about $300 million in revenue at the time.

DSOPro: Describe the scope of the operations.

Each individual site had a different scope. In Canada and the United States, the scope was largely confined to support of oil and gas exploration and extraction projects. There was not a lot of primary care, it was mostly aeromedical evacuation. The scope was narrower in places like Sierra Leone, such as dealing with an Ebola outbreak. Each individual site had very different needs. 

We had a core staff of people in all these countries providing the licensed health side of things. We would also employ local staff in the locations we happened to be in to do things like cleaning, cooking, and in some cases, environmental health. An example of that would be in places that were malaria or dengue prone where they did fogging for mosquitoes to minimize the likelihood of people contracting diseases.

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DSOPro: What was your next career move?

I became what I call one of the most hated men in dentistry—a C-suite executive at a dental insurance company. I did that for a few years before moving into consulting, particularly management consulting. My expertise is strategic management. I work with emerging DSOs, some nano-, micro-, and mid-cap size DSOs, as well as “para dental” companies. Those are companies that support dental groups, for example, providing RCM support, dental temping and staffing agencies, dental tech and SaaS, and medical devices related to the dental space.

DSOPro: Explain your approach and philosophy.

One of the things we tend to strive for in dentistry is efficiency. “We want to be more efficient.” You hear that everywhere. This is a function of time as well as how you reduce input costs. But for me, the key is to target effectiveness over efficiency. I believe what Peter Drucker said, “There is nothing quite so useless as doing with great efficiency something that should not be done at all.”

What strategic management helps to do is clarify what is going to be effective. That idea is that vision gives rise to mission. Mission gives rise to strategy. Strategy gives rise to tactics, and tactics gives rise to operations. So, it’s only when you actually know what you are trying to achieve that you can make your operations efficient in order to reduce input costs, or perhaps to reduce re-work, or increase production per unit of time.

In dentistry we tend to focus very heavily on operations, and we tend to have our operations drive our strategy. If you’re a reader of Sun Tzu, who wrote The Art of War, he says that “Strategy without tactics is the longest route to victory. Tactics without strategy is the noise before defeat.”

So, that’s the way I position it. I help people identify what their generic strategy should be, and then how to implement appropriate tactics to support that strategy. From there, I help people learn how to drive efficiency in their operations to support their tactical plan whether that means implementing Six Sigma, Kaizen, Total Quality Management, Lean, or whatever that organization prefers their model of continuous improvement and efficiency to be.

It’s strategic in terms of utilizing a toolkit of different management toolkits like Porterian analysis, Herfindahl-Hirschman index, and other tools like TOWS analysis, SWOT analysis, and Stakeholder impact analysis to determine in the environment in which you are competing or operating what is the most valuable competitive position for you to optimize profitability within that industry.

That helps people to determine how to utilize these toolkits. Are we in a better position based on our strengths, weaknesses, opportunities, and threats to undertake a cost leadership strategy, or do we have some sort of moat in terms of our business operations that allows us to have a differentiated strategy where we can demand a premium for our services because we add value in some way that competitors can’t? Or do we take on a focused strategy where we target specific market segments? And because we know those market segments so well, we can utilize localized isolating mechanisms around those specific market segments to compete effectively against some of the larger competitors that might otherwise crush us if we chose to use a cost leadership strategy.

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For example, if you chose to utilize the cost leadership model, we would ask, what are the options here in terms of becoming aggressive amalgamators to optimize the demand side network effect to reduce input costs? Or perhaps we may choose to reduce input costs by outsourcing rather than keeping things in-house.

We may decide to eliminate research and development and reduce service mix in order to focus on key profitable services. We may choose to exit certain markets simply because they’re not profitable, and then we can be the cost leader. One thing I do always tell people is that being the cost leader doesn’t mean low quality. What it means is that for a given level of quality, you are the cheapest option in the market. 

I often use luxury motor vehicles as an analogy. You have Porsche, Audi, BMW, Mercedes, Lexus, Genesis, Acura. All those cars are arguably high-quality cars, but one of them has to be the cheapest. For any given level of quality, there will always be a cost leader in the space. You could certainly be a cost leader that offers a certain level of high-quality service, but you have certain economies of scale or potentially external and internal economy at scale within your enterprise, which allows you to be the cost leader.

DSOPro: How does this apply to how a DSO operates? 

Let’s talk about it in terms of a group, not just the management company, and what the strategy would look like if we chose cost leadership as our generic strategy. How do we optimize profitability by reducing input costs? Maybe shaving away unnecessary functions like research and development. How do we implement a just-in-time pool-based supply chain? Do we want to think about undergoing some sort of vertical integration of financing or supply and delivery of healthcare and dental services?

What does that mean in terms of our acquisition criteria? If we have created systems, processes, and integration models based around volume and being a cost leader, it would then inform us that our acquisition criteria for growth shouldn’t be looking at fee-for-service practices. We shouldn’t be looking at practices that have a differentiated or a focus model. We should look at practices that either currently operate in terms of a cost leadership model or where there is potential for cost leadership to be implemented within that structure. That informs us in terms of growing and scaling a DSO through acquisition.

DSOPro: What trends are you seeing that may or may not shift your approach or are enhanced by the way you approach it? 

Let’s step back a bit and talk about some background, something called the Competitive Life Cycle. In any industry, there is a competitive life cycle made up of three phases. The emergent phase is where there’s limited growth until we achieve a certain annealing event, which is the adoption of a standardized or an accepted model of practice or a dominant technology. Once that is adopted by the industry, then the growth phase occurs, which is rapid rises in growth. When you get to something called a “shakeout event,” you enter something called the maturity phase, which is characterized by stagnation or reduced growth in cumulative industry revenues. We see a downward pressure put on profitability, and a reduction in the number of firms. 

Dentistry is currently undergoing what’s called a “seismic shift shakeout.” For the longest time, dentistry as an industry has been in a position of “protected profitability.” A lot of isolating mechanisms around dentistry have protected it from true competition. There is specialization in the kind of equipment used. There have been increasingly high startup costs and regulatory barriers applied by regulators that prevent people from entering the industry.

There has not been significant competition within the vendor space. In fact, we’ve seen consolidation in that vendor space. That puts downward pressure on profitability within the industry. 

Significantly, we’re seeing regulatory environments becoming less favorable to the dental industry. The most recent ones were the lawsuits in Alabama and Georgia, where the Department of Justice and the Federal Trade Commission filed amicus briefs, which are letters of support, against the dental boards in those states in favor of tele-dentistry companies.

The loss of isolating mechanisms has precipitated this industry-wide seismic shift shakeout. From a DSO growth perspective, it means that there are two kinds of winners coming out of the shake out. One is the aggressive amalgamator, those DSOs that can acquire and consolidate very quickly. Those require aggressive debt financing, significant economies of scale, and the appetite to move into complimentary industries outside of dental. A good example would be The Aspen Group. They’re taking on some more medical-cosmetic opportunities in addition to dentistry and are moving into medical primary care outside of the dental space as well as looking to integrate medical and dental together.

The other winners, from a DSO perspective, are the adapters. They’re the ones who can see that they can’t compete from an economy-of-scale standpoint. What they will do is “niche down” and look very carefully at a focused model where they can take advantage of localized buffers or isolating mechanisms, which are so specific that it makes it difficult for the larger, mass-market organizations or DSOs to compete effectively in that space. Good examples are DSOs that specialize in All-on-4 implants, such as Nuvia Dental Implant Centers. They are taking advantage of localized isolated mechanisms to reduce their input costs because now they can, for example, market to and specifically target people who want implants. They don’t have to market Invisalign, tooth whitening, crowns, or ortho. They can reduce their customer acquisition costs considerably.

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The trends I’m seeing are increased adoption of a focused strategy where DSOs are focusing on a much smaller service mix than a traditional DSO. We’re seeing outsized growth in some of these specialist DSOs that focus on endo, oral surgery, ortho, or pediatric dentistry.

The other thing we are seeing is a rightward shift in something called the Herfindahl-Hirschman Index. That index is a measure of how competitive an industry happens to be. It ranges from zero to 10,000. Zero means it’s a perfectly competitive industry where no competitor has any significant market share. At the other end of the scale, at 10,000, you have a perfect monopoly. Some states are significantly more open to the corporate practice of dentistry and have lower regulatory hurdles to enter the market, whereas other states are very strict on ownership and who can play in that particular dental market.

We don’t have an exact number for dental, but we can see a rightward shift in the Herfindahl-Hirschman Index of about 170 points. That means we are moving to a less competitive, more consolidated industry. That’s significant. A rightward shift of 200 points or more usually triggers antitrust provisions and investigations by the Department of Justice. So, we’re moving at a rapid pace toward consolidation in the dental industry.

We’re also moving toward a more concentrated industry. I think there is significant consolidation yet to occur. I expect that by about 2026, somewhere between 60% to 65% of the dental market by capitalization to be DSO affiliated in some form.

There is an infinite number of decisions or alternatives out there in terms of what you implement in your business. I help people define, from a quantitative standpoint, the most effective alternative in terms of creating the impact we want to create for stakeholders. I use something called a “triple bottom line approach.” I call it the three Ps: people, planet, and profit. Those are the things that matter to stakeholders. We need to optimize or maximize positive stakeholder impact across those dimensions.

 

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About Dr. Hendrik Lai

Dr. Hendrik Lai is a seasoned management consultant and speaker. He is highly sought after for his expertise in strategy development, process improvement, and organizational change. With over 15 years of experience in management consulting, Hendrik has provided valuable guidance to clients across a diverse range of industries, including healthcare, financial services, education, and technology. A respected industry thought leader, he is regularly invited to deliver key industry addresses and speak at conferences and events around the world. His insights and expertise have been featured in major media outlets such as Fox, CW, ABC, NBC, and CBS, as well as industry specific media. Hendrik is passionate about helping his clients distill the insights that matter to drive the changes that matter.

Sage Consulting

Sage Consulting, a specialized boutique firm, offers business, managerial, strategic, and operational consulting services tailored to individual doctors, small groups, and growing to mid-size dental service organizations (DSOs). We are committed to driving impactful change by uncovering crucial insights and adopting a data-analytics-based decision-making process, known as the Sage Approach.

Established by seasoned industry professionals, with over half a century of experience, Sage Consulting brings to the table a rich, global, and local experience. This includes clinical, operational, and business expertise in diverse settings such as individual private practices, group practices, DSOs, military, non-profit, and academia.

Our offerings are carefully crafted to meet the needs of our clients throughout their business lifecycle. These include strategic planning with a focus on risk management and business continuity, M&A, and operational optimization encompassing patient scheduling, revenue cycle management, practice growth, and inventory management. Additionally, we provide coaching and leadership development for doctors and teams, fortifying their skills for greater success.