Are DSOs headed for trouble?

June 21, 2017

Most likely yes–and here’s why.

“Why do good companies go bad? It’s often assumed that the problem is paralysis. Confronted with a disruption in business conditions, companies freeze; they’re caught like the proverbial deer in the headlights. But that explanation doesn’t fit the facts. In studying once-thriving companies that have struggled in the face of change, I’ve found little evidence of paralysis. Quite the contrary. The managers of besieged companies usually recognize the threat early, carefully analyze its implications for their business, and unleash a flurry of initiatives in response. For all the activity, though, the companies still falter." -Donald Sull

The juggernaut successes of the meta DSOs such as Heartland, Aspen and Pacific left a slip-stream for others to rapidly grow like Deca and North American Dental Group. Their continued growth and success seems unstoppable. But as Sull points out in his article, many DSOs more than likely will follow the path of other companies that had meteoric rises to success only to nosedive.

The problem will not be an inability to act, but an inability to take appropriate action. There can be many reasons for the problem-usually it is leadership and managerial inflexibility and arrogance-but the most common issue according to Sull is a condition that he calls “active inertia.”

“Inertia is usually associated with inaction-picture a billiard ball at rest on a table-but physicists also use the term to describe a moving object’s tendency to persist in its current trajectory," Sull writes. "Active inertia is an organization’s tendency to follow established patterns of behavior-even in response to dramatic environmental shifts. Stuck in the modes of thinking and working that brought success in the past, market leaders simply accelerate all their tried-and-true activities. In trying to dig themselves out of a hole, they just deepen it.”

As radical changes occur in the future, many DSOs will be stuck in the past. They will do what they have always done, thinking that will alter their downward spiral. But the past will not work in the future. How to think and act differently will be their major challenge.

In his book, “How The Mighty Fall,” Jim Collins explains the five stages that are classic in how successful companies fall. Arrogance and regarding success virtually as an entitlement are signs of Stage 1, what Collins calls “Hubris born of success.” In this stage, people lose sight of what made them succeed in the first place and start to think that they can succeed in anything.

It’s a short way from Stage 1 to Stage 2, “Undisciplined pursuit of more,” in which companies pursue more growth with undisciplined moves that do not fit into their core business. Either it’s the area the company leaps into or the fast pace of the growth that hinders the company to excel, or sometimes both.

In Stage 3, “Denial of risk and peril,” things look good on the outside, but internal signs of decline are appearing. Companies tend to amplify positive data and discount, or explain away, negative data.

Denial may lead to Stage 4, “Grasping for salvation,” in which the decline becomes visible to all. It’s instinctive to do everything the leaders can think of to reverse decline in this stage. But the key is not to do everything at a frantic pace, but to think what not to do with a focused approach.

Stage 5 is “Capitulation to irrelevance or death.” In this stage, all the repeated unsuccessful attempts have drained both the company’s finances and leaders. There’s no turning back from this stage.

Collins proposes the knowledge of the five stages serves as a diagnostic tool kit.

As radical changes occur in the future, many DSOs will be stuck in the past. They will suffer through the five stages Collins presents. Right now, many of the DSOs are clearly in Stage 1 and Stage 2. Opening one to two practices each week, pushing their political agendas successfully, crushing the solo practitioners, increasing their leverage in transactions-they are riding high.

But when AI, cloud computing, integration with electronic patient records, Big Data, self-diagnosing technologies, genomics, major shifts in reimbursement and other disruptive technologies come into play, how to think and act differently will be their major challenge.

Oh, and if you think solo practices will be saved, this is a fantasy. Some DSOs will figure out how to “change their stripes” and continue their success. Others will be road kill. But solo practices are basically headed for extinction.

My prediction is new form of DSOs will appear that utilizes the disruptive technologies appearing in dentistry as well as fully understanding the emerging market of Millennials and Generation Z. And these will be the ones that are the next round of successful DSOs. And some-certainly not all-of the current DSOs will be able to transform themselves to adapt to this new ecology of dentistry and not only maintain their success but dominate the market.