Squeezing the tube Featured

8:00pm EDT September 20, 2006
Here’s a formula for success that almost can’t miss: Buy up companies in a fragmented industry, take advantage of economies of scale to manage the super-sized entity, squeeze out the inefficiencies and sit back and reap the profits.

 Sounds easy — a little too easy, says Steve Bilt, president and CEO of Bright Now! Dental Inc.

“People make a huge mistake around trying to define economies of scale, and the mistake they make is that they think economies of scale come from scale, and the reality is, economies of scale come from economies applied to scale,” says Bilt.

Bilt says that his company made mistakes along the way to becoming a $400 million, 4,000-employee company. But putting together a retail-based model has allowed it to add not only size, but value.

Bilt and the investors in Bright Now! envisioned a company in which dental offices would spend nearly all of their energies tending to patients. But he says simply taking over administrative tasks for the offices wouldn’t provide the maximum value, even with scale.

“The key to any business is to stare openly and honestly at where you add value, and you have to be honest with yourself,” says Bilt. “You can’t say, ‘I’m doing this because it adds earnings.’ You can’t buy earnings.

“You have to be able to say, ‘This is worth more in my hands than it is in anyone else’s hands.’ If it’s not really that way, you should probably stay away from it. People try to do roll-ups and try to grow businesses, and they do it with this amorphous concept of an economy of scale in mind, but if you’re not extremely efficient, the bigger you get, the more inefficient you become.”

The company’s model provides the typical support services to its dental offices, such as legal, human resources and accounting, but also brings retail knowledge in site acquisition, development, marketing and consumer credit and couples that with capabilities such as call centers to handle patient inquiries. That, says Bilt, is the value-added that maximizes the economies of scale.

But despite the plan, the road wasn’t always smooth.

Bright Now! launched in 1998 with the combination of three dental services companies and almost immediately ran into problems. Its dental offices operated in much the same way traditional dental practices had in the past. Its information systems were fragmented, and its professional and support staff were spending too much time on tasks unrelated to patient care.

Early on, many of its offices weren’t operating according to the retail model that was envisioned.

“Part of the reason for that was, actually the lion’s share of it, was in the way we were communicating, of what the key components were of that model,” says Bilt. “We had made a bunch of acquisitions that functioned in different types of models that weren’t the pure retail model.”

Fixing the problem started with solidifying the relationship with the dentists, making sure they understood the model and how it added value.

“We started to introduce some mental models for people in terms of operations, so we had a doctor relationship model that we introduced — here’s how we want to work with doctors,” he says. “We’re going to sit down with doctors, we’re going to envision what our strategy is, we’re going to see if our strategy and theirs coincide, and we’ll decide right up front if it makes sense for us to work together or not.

“If it does, let’s set about defining what it is we’re going to bring to the table to add value, what the doctor’s going to do, and be responsible to do to add value, and we’re going to set about doing those things, hold each other accountable.”

They spent five years honing the plan and making sure the business model was right.

“Then we bought a company three times our size,” says Bilt. “Then we bought a company a third again our size. Fortunately, we had invested heavily around some management principles and ideals about how to run these businesses.

“That didn’t stop most of our infrastructure from breaking when we got that big, but it enabled us to get through the storm because our people knew our model so well.”

Realigning and reinforcing management
As the company grew, Bilt realized that the management structure didn’t encourage or facilitate communication across the organization.

“We had our management structure put together in a way that divided up the company so that individuals didn’t have much span of control,” says Bilt. “We didn’t have a vehicle to communicate best practices across the organization. We set it up in small bites, so what we had were great operators, great people with great intent, but these small bites made it difficult to have a forum to communicate across the whole business.”

Bilt reorganized the company into six areas and developed an operations services group responsible for leveraging best practices across the country. Each of the area heads, as well as the operations services group, reports to the COO. Bilt says that puts key decision-makers both closer to the ground and in more manageable groups to allow for a much more efficient flow of information.

Bilt gave field operators greater responsibility for running their individual units and territories. The company provided the resources to push business through the individual dental offices but decentralized control to the local level, giving individual managers more responsibility for the day-to-day operations.

“We’re going to help drive traffic through your practice, we’re going to give you consumer credit tools, but at the end of the day, you’re going to have holistic responsibility for these businesses,” Bilt says. “We pushed that accountability all the way down to the office manager level. As we did that, they responded. People are amazing when you give them the information and the tools they need. They’re amazing the responsibility they’ll accept.

“A lot of it was pushing that authority out to the field. Making them entrepreneurs in their own right was really powerful for us.”

Scale allows — and almost requires — a company to bring specialists in who can manage the operational segments of the business.

“When we were smaller, we had a director of marketing, we had a director of IT,” says Bilt. “As we’ve gotten bigger, we’ve been able to bring in specialists. We’ve been able to bring in a marketing person who’s been a retail marketing person for three or four companies, major brands like Taco Bell, Burger King, Gillette, Unilever. We recruited a chief information officer who’s been CIO of five different companies and really has a good sense of what we’re trying to do to become world class. We were able to bring in a guy who’s built hundreds and hundreds of retail sites. That scale enables us to invest in high-level specialization because each job becomes so big that no one can do two of them, whereas back in the old days, one guy might have three of those positions reporting straight to him.

“That’s actually been a huge win for us in terms of what we’re able to do in terms of expertise inside the company.”

Improve information systems
If you are spending 5 percent of revenue on supplies, you can grow the business and get better pricing from suppliers merely because of increased purchasing power, but that’s just the first step.

“I can’t really get sustainable and lasting and really 100 percent of the economies I should get unless I turn around and, rather than have my 300 office managers pick up a catalog and work with a local rep, I step back and create an Amazon.com quality purchasing system, with a clinical board of practitioners saying these are the best things to buy because of the economies and because of their clinical value,” says Bilt.

Bright Now! created such a system, including a formulary set by practitioners, budgetary parameters and spending alerts.

Because a substantial share of dental patients pay fees out-of-pocket, a key to fulfilling the retail model was an effective consumer credit system that could efficiently and effectively approve credit for customers. The former system, now being replaced across the board, was essentially an onsite approval process, where local managers made the decisions about granting credit.

Bilt says the system worked, and the company was successful granting credit with it. But to achieve economies of scale around credit, the model was not practical. The drawback was that it was highly dependent on the individual manager’s focus on the program and varied based on his or her risk tolerance.

“If we took our credit methodology and rolled it out over scale, it would have crashed,” says Bilt.

With scale, the company needed a streamlined, centralized system that could apply uniform standards and speed approvals.

“The difference between our new national system and the previous customized local system is our increasing reliance on data and specialization,” says Bilt. “Whereas credit decisions were previously made locally based on our written credit guidelines, under the new system, we are able to electronically determine the amount of credit we are able to extend to a patient and then the offices are able to offload that credit to our centralized receivables management teams.

“While we certainly have office managers who are experts at making these credit decisions, and we may even see some increases in the area of bad debt as these experts offload the function, on average, we have seen improved overall performance relative to this expense and have, more importantly, taken a significant time and mind-share commitment away from the offices to enable them to focus even more time on patients.”

Another key to maximizing the benefits of scale is to integrate the company effectively, making sure that expansions or acquisitions are rolled into the systems quickly and smoothly, and that the cultures are uniform.

For example, the company folded in its two largest acquisitions in large part by giving field management greater control and decision-making authority over the branch offices.

“If you don’t have one culture, if you don’t have one way of doing things, if you’re not integrated, there’s no way that you’re doing things consistently enough to truly achieve economies,” Bilt says. “Then what happens over time ... when you finally get around to it, people will say, ‘Why now? It’s not the time to do this, we don’t need to bother with that.’ And you never get the chance to use the mass of your organization in your favor.

“If you don’t move to integrate the business quickly, your culture, by default, is degrading because you now have different nation states. ... You can’t say what your culture is if you haven’t integrated the businesses, because it’s what the local flavor says it is. If you don’t do that, it’s really impossible to achieve economies of scale.”

How to reach: Bright Now! Dental Inc., www.brightnow.com