As the dental support organization (DSO) industry gains sophistication and maturity, the most successful operators are shifting their focus from clinic aggregation to operational professionalization. That’s one of the key takeaways from the annual Association of Dental Support Organizations (ADSO) Conference, attended by Harris Williams & Co. Healthcare & Life Sciences Managing Director Geoff Smith and Associate Nathan Robertson. In this report, we share their insights on how DSO strategies are shifting in this dynamic environment.

A Proven Model Begins to Shift

In recent years, DSOs have transformed the dental service model and gained favor among investors. While the traditional dental model consists of single offices providing services to surrounding areas, DSOs partner with and support multiple dental practices, professionalizing key business processes while creating efficiencies and economies of scale. These practices can provide dental services under a shared retail brand—for example, Aspen Dental and Heartland Dental—or through individual offices that retain their own identities.

In either case, by supporting management and sharing resources across offices, DSOs can help improve financial performance while allowing dentists to focus on caring for patients.

“DSOs can support a dentist’s marketing, IT, advertising, purchasing, scheduling and more. They can bring additional sophistication and cost savings to the business,” says Smith.

DSOs have long been appealing to private equity investors for several reasons. For instance, like many medical professions, dentistry is characterized by recession resilience, fragmentation, and the opportunity to build platforms of scale that benefit from significant multiple arbitrage and professionalization.

In fact, dentistry is even more appealing than some other medical professions, explains Smith: “It has traditionally had favorable cash flow and reimbursement characteristics, plus it’s lower on the acuity scale than some other professions, which can reduce complexity and risk.”

However, as the popularity of the DSO model has grown, clinic acquisitions have become more costly, putting pressure on multiple arbitrage as the key investment thesis. While substantial opportunities remain to execute roll-up strategies, leading DSO platforms are increasingly shifting their focus toward operational improvements to drive sustainable growth.

“We’re starting to see a shift from pure aggregation and de novo DSO models to more investments in platform operations,” says Robertson. “In particular, larger platforms are looking at ways to boost value through same-store growth and profitability improvements.”

Better Data Drives Better Decisions

One of the most important ways DSOs can improve operations is through technology. Multi-site platforms often have a wide variety of legacy systems in place, which makes reporting and tracking key business metrics unwieldy. 

“Getting all of the offices on a single enterprise resource planning (ERP) platform can be very powerful,” says Smith. “It can dramatically increase visibility into business performance and help dentists make better-informed decisions.”

ERP systems can provide visibility into revenue, profitability, customer retention and a host of other key performance indicators. “Knowing what's going on in your practice is a big piece of driving organic same-store growth,” explains Smith.

For example, understanding the margin impact of different services can help dentists make better staffing decisions. “A sophisticated, data-driven DSO can help a dentist see where they are spending their time,” says Smith, “and where a hygienist could be more or less involved.”

Likewise, the most sophisticated DSOs are borrowing heavily from the retail industry to understand and retain their best customers. “We’re seeing much more sophisticated customer acquisition models coming into play,” says Smith. “The best DSOs are figuring out who their patients are, and designing marketing and customer service models to maximize their value.”

As with ERP systems, better visibility is essential to these new marketing models, with the most advanced DSOs measuring the effectiveness of their marketing efforts and adjusting accordingly, extracting maximum value from every dollar spent.

The Advantages of Experience

As the key success factor for DSOs shifts from aggregation to operations, investors with experience in multi-site healthcare businesses will enjoy an advantage. “Going forward, we expect to see veteran operators having more success than pure financial engineers,” says Robertson. “They’ll have the benefit of past experience extracting maximum performance from their platforms.” 

Smith agrees, adding that the magnitude of the DSO opportunity is an incentive for investors to draw on external talent: “If groups don’t have that expertise internally, they are looking to bring it in. That could be through operating partners or through seasoned advisors that bring the right mindset and toolkit to this industry.”

This will be particularly true as uncertainty regarding the current economic cycle continues to mount. “Dentistry is a great segment in any economy,” says Smith. “And as people start looking for defensive investments I think its appeal will only grow.”

Conclusion

DSOs hold enduring appeal for investors, boasting a unique combination of resilience, fragmentation and favorable business dynamics. Yet as the DSO model continues to mature, forward-looking investors are shifting their focus from roll-up strategies to professionalization. The most successful operators will draw on past experience in multi-site healthcare, implementing proven tactics to extract maximum value from their platforms.

Published May 2018