January 2017
Volume 8, Issue 1

Buckle Up and Grow

What to know before taking a small or medium-sized laboratory to the next level

By Jason Mazda

Novelist William S. Burroughs said, "When you stop growing, you start dying." It's no secret that over the last decade the number of dental laboratories operating in the US has decreased significantly; analysts have predicted there will be 39% fewer in business this year than in 2006, with further constriction expected between 2018 and 2020.1 Of those that remain, some are large laboratories with a comfortable hold on their market share, and some are boutique laboratories that have settled into a high-end niche. A third group falls in the middle, however, and many of these laboratories face a difficult decision: Stagnate or survive.

"Laboratories that do not grow will go out of business eventually," says Conrad Rensburg, CDT, owner of Absolute Dental Services in North Carolina.

Ample opportunity exists for growth and expansion, as a result of the continued closures of competing laboratories and expectations for moderate growth of the dental industry as a whole.2 Expansion, however, is rarely as simple as hiring a few more employees and taking on a heavier caseload; it involves numerous challenges and varying degrees of change, often starting right at the top.

"Above all else, owners need to change the way they think," says Bob Yenkner, owner of Practical Process Improvements (PPI), who consults primarily with laboratories that employ between five and 25 people. "If laboratory owners plan to maintain the small-business mentality of running the laboratory from the bench rather than delegating, they stand very little chance of successfully expanding their business."

After laboratory owners have accepted that change is a necessary part of growth, Yenkner says, they must visualize exactly what they want to accomplish. How much do they want to grow? How quickly? In what areas will this growth occur? Is the ultimate goal to sell the business once its value has increased?

Once those questions are answered, two primary growth strategies can be considered: organic and acquisition. Organic growth involves taking steps such as hiring additional employees or purchasing new equipment to increase production. Acquisition, meanwhile, entails purchasing an existing laboratory or laboratories and integrating them into your business. There is no right or wrong choice for everyone.

"Every business has different strengths and different goals," Yenkner says.

Organic Growth

The National Association of Dental Laboratories (NADL) defines medium-sized laboratories as employing between 10 and 25 people, and those numbers loosely match up with the approximate thresholds at which major changes must be made, according to several successful industry professionals. As a laboratory approaches 10 employees, the owner is left with little choice but to delegate responsibilities and consider leaving the bench to focus on management; as it surges past 25 employees, the owner must consider a structure that includes human resources, financial specialists, administrative staff, and more.

The first step is for the owner to adjust to the role of CEO. That means working less on the bench and delegating responsibilities. It also means effectively managing a team.

"The leap in job responsibilities was very tough," says Rensburg, who has grown his laboratory from six employees to approximately 90 in the 12 years that he and business partner Drew Van Aarde have owned it. "My biggest challenge was learning to be a leader. I was a dental technician by trade, but I had a team of people looking to me for guidance and leadership. The managerial crisis that is created by expanding a laboratory is what keeps many from growing."

The NADL's 2016 Business Survey found that owners and managers of medium-sized laboratories (10-25 employees) allocated 44% of their time to administrative/management duties, versus 56% to working as dental technicians. By contrast, the survey found a 21/79 split for small laboratories and 58/42 for large laboratories.

"There comes a time when someone needs to work on the business instead of in it," says Michael Capps, CDT, owner of Technic Dental Lab, a 20-person laboratory in Orland Park, Illinois, that has grown steadily over the past decade. "You need to delegate and direct."

That is not to say having dual roles is impossible. Israel Levin, President of Aim Dental Laboratory in Brooklyn, New York, says he never stopped working at the bench even as his laboratory increased from 11 employees to 146. He worked hectic 12- to 16-hour days, however.

"It was very hard work," says Levin, who 4 years ago sold the business but still works 3 days per week. "I never sat in my office. My hands were constantly moving as I dealt with business matters on the phone or spoke to sales representatives next to my bench. I ripped myself apart. I'm not complaining, because I succeeded, but it took a lot of tenacity, hard work, and sleepless nights."

Levin's success was not just a matter of multitasking. Laboratory owners who are technicians by trade generally must acquire business skills in order to run larger operations successfully.

"I read business books like there is no tomorrow," Levin says. "I attended business seminars as frequently as possible. I also belonged to a group here in New York in which 12 owners of different businesses gathered every month to learn from guest speakers."

An alternate option for owners who prefer to remain on the bench is turning over the management responsibilities to someone with formal business training or experience. This can be an existing member of the team, or outside help can be sought.

Puche Dental in Torrance, California, has pursued both of those strategies. Owner Luis Bignone's son, also named Luis, earned a college degree in Business Administration, and in the role of Lab Director he has spearheaded growth from approximately 25 employees to 60 in the past three years. As the laboratory continues to grow, an Executive Director also was hired.

"No one else at this laboratory had ever specialized in business skills," the younger Bignone says. "There had been no vision or planning. I sat down with my father and some key employees and asked, 'What do we want to accomplish in the next 5-10 years?' We established that, and we broke down how we planned to accomplish it, and we evaluated our progress at certain strategic checkpoints.

"Most dental laboratory owners are technicians, so they focus on producing another restoration to get paid. Having people focus on planning the growth and healthiness of the company is vital."

Rensburg says he tried to delegate management responsibilities to technicians but found the most success when he hired a Chief Operations Officer, at a time when he had approximately 45-50 employees.

"My advice is to hire a COO who is not a technician," says Rensburg, whose leadership team now also includes a Chief Financial Officer and approximately 10 other people. "Technicians are technical people, and it is very difficult to change people. Once I hired a non-technical COO, my business took its biggest leap forward."

Management is not the only non-technical skill required as a company grows. Issues such as insurance and accounting become much more complicated and time-consuming as a business grows larger.

A 1983 Harvard Business Review article titled "The Five Stages of Small Business Growth" notes that a company must hire personnel that will "eliminate the inefficiencies that growth can produce and professionalize the company by use of tools such as budgets, strategic planning, management by objectives, and standard cost systems—and do this without stifling its entrepreneurial qualities."3

"Generally, I have observed a need for some professionalism in human resources and finance once you reach 15 employees," Yenkner says. "You might only need part-time employees for those roles at that point, especially if your laboratory management software has certain capabilities or someone in the laboratory has a degree of acumen in those areas, but they definitely should be addressed in some form."

The NADL 2016 Business Survey found that only 43% of small laboratories offer health insurance, compared with 73% of medium-sized laboratories. Other benefits such as retirement programs, life insurance, disability insurance, dental insurance, and vision insurance are offered by some medium-sized laboratories and a majority of large laboratories, according to the survey.

Meanwhile, Rensburg says a laboratory can easily add at least 3-4% to its bottom line just by controlling its spending, so at a certain point a well-paid financial specialist can be worth hiring.

The NADL 2016 Business Survey supports the notion that the medium-size range is where laboratory owners are making decisions on adding non-technical personnel. In the survey, 89% of small laboratories said they spent less than $100,000 on payroll for non-technicians, while 84% of large laboratories said they spent more than $250,000 on those positions. Medium-sized laboratories, meanwhile, fluctuated significantly: 49% spent less than $100,000, but 28% spent more than $250,000.

Allocating payroll to employees who do not directly generate revenue can be a difficult adjustment for some laboratory owners. However, at a certain point it becomes a necessity.

"You can no longer function as a mom-and-pop operation once your number of employees reaches the mid-teens," Rensburg says. "As the owner, you cannot be spending time on planning the Christmas party and other tasks like that."

Specialized personnel can aid with even the most basic element of business growth: hiring. Employing a recruiter can help a laboratory put the right people in place.

"If you plan to grow, hiring cannot be an afterthought," Yenkner says. "If everyone is stacking porcelain, fabricating parts, and packing boxes, who is combing the job sites and calling candidates?"

Acquisition

Laboratory owners who want to bypass the hiring process and grow more quickly can choose instead to purchase another laboratory.

"If you can afford to write that large check to the bank, then you can instantly gain a complete operating entity," Yenkner says, adding that new ownership should expect to retain approximately 75% of a laboratory's clients in a typical acquisition.

A valuation must be performed before any acquisition, ensuring that the laboratory will be worth the price being paid. Questions that should be addressed include whether the business will retain its value once the previous owner exits, and how that laboratory's products fit in your portfolio.

"If your specialty is zirconia, purchasing a laboratory that produces mostly PFMs might not be a sound investment if that laboratory's employees leave and you do not have people and processes capable of supporting a PFM business," Yenkner says.

Integrating the additional laboratory's operations into your own can be a complex and challenging process. The owner must decide whether to run it as a standalone operation or merge it into the main laboratory. If the latter option is chosen, it may be necessary to move to a larger space.

Levin at one time tripled the size of Aim Dental Laboratory's operation by purchasing a 100-person operation. He moved all of his employees into that facility. Over the years, he acquired several other laboratories and for some time operated them under separate names, but he found that marketing was more effective under one name.

Apex Dental Laboratory Group, meanwhile, has taken a different approach by operating nine separate laboratories in the Midwest region, ranging from six to 22 employees each. The company has a management team made up partly of some of its laboratories' original owners, as well as a corporate team that handles human resources, accounting, marketing, bookkeeping, and more.

"Through the affiliation and the group, we are able to gain the same benefits and advantages as a large laboratory in terms of buying power, efficiency, and resources," says Travis Zick, Vice President and COO of Apex. "However, as small to mid-size laboratories, we maintain that personal interaction and service for our clients."

In addition to pooling its resources for non-technical staff, Apex handles casework with a degree of cohesion as well. Department heads at each of the laboratories have a weekly conference call with Technical Director and Internal Trainer Charles McClemens, CDT. They use the same materials, and they help each other with casework when necessary.

"Working together and utilizing today's technology, we are able to avoid situations in which one laboratory is paying 20 hours of overtime while employees are going home early at another laboratory," Zick says. "Sharing knowledge also is helpful at a time when skilled technicians are hard to find."

Regardless of the model for integrating multiple laboratories after an acquisition, the issue of culture can present a challenge. Integrating employees who have been accustomed to a certain work environment and certain rules is usually more difficult than training a new hire, Yenkner says. Cliques can form, causing tension. Employees who are used to a certain workflow may be resistant to learning a new one.

"All of these factors must be reviewed with an acquisition," Yenkner says.

Indeed, Zick says he and his partners give strong consideration to culture when doing their due diligence before an acquisition.

"If the philosophies will not mesh, it will not be a fit for us," Zick says.

Once Apex acquires a laboratory, McClemens spends time onsite for training and observation. The company also targets laboratory owners willing to stay on for at least 2 years after the acquisition, so that the onsite leadership remains steady throughout the transition.

"When you have a large number of employees spread out across nine laboratories, issues will always arise," Zick says. "The most important key that we have learned is to have strong onsite management. It is very difficult to manage from a distance, so you need onsite management that is an extension of the board, the ownership, and what we want to accomplish."

If a newly acquired laboratory is not effectively integrated into the overall operation, significant damage can be done to the brand.

"It is very easy to anger a client, and in such a competitive industry there are plenty of laboratories ready to offer a lower price," says Levin, who prioritized training whenever he acquired new laboratories. "I made sure from the start that our people were ready and trained correctly. Uncontrolled growth is a disaster."

Planning and Decision Making

Exercising control is not always easy for business owners, many of whom got where they are with an entrepreneurial spirit. It is important to keep in mind, however, that one or two imprudent decisions can bankrupt a company.

"You need to work within your budget and your means," says Capps, who built a brand-new facility in 2006 but had to temper Technic Dental Lab's growth plan shortly thereafter due to the economic recession before growing by 25% in 2014. "You need to monitor your finances and ensure that you are not overextended. For every investment, you need to ask yourself, 'Am I willing to take this risk? What will happen if this fails completely?'"

Puche Dental, which was purely a removables laboratory until recently, purchased CAD/CAM equipment to produce chrome cobalt removable partial dentures digitally before opening a crown-and-bridge department, adding more CAD/CAM systems, and more than doubling in size.

"We got comfortable with accepting STL files for our existing product line before we began fabricating all-ceramic restorations on the crown and bridge side," Bignone says.

During the planning stages, it is important to ensure that the bottom line is growing—not just the revenue and production.

"Some laboratories say they want to grow, but they do not have an effective marketing program or they have no clue which product line they want to grow," Yenkner says. "For example, adding 10% per year for a product that only yields 3-4% margins is not a good long-term plan."

Another Harvard Business Review article suggests that businesses must anticipate a plateau with some growth strategies: "Many smaller companies are fortunate to find a market niche for a service or product that grows rapidly. When this happens, 'rinse and repeat' (or 'ride the wave as long as we can') becomes the plan to manage growth. This approach ignores the reality that one day the wave will crest. Being able to quickly multiply successes is not the same as building for sustainable growth. Taking the time to design an organization that can sustain growth is what distinguishes great executives from those that eventually get swept away by the wave. Scaling up to manage growth involves constantly questioning how your organization should look—in advance of intensified growth."4

Maintaining a Quality Product

Regardless of growth strategy, it is important for any business to retain its unique selling propositions, which for many small to medium-sized laboratories include quality and customer service.

"When dentists hear you are growing, sometimes they interpret that to mean they will no longer get the same level of personal service," says Bignone, whose laboratory has created a technical support team dedicated to answering both internal and external technical questions.

Rensburg says Absolute Dental Services utilizes four levels of quality control (QC), including two full-time employees dedicated to QC.

"Our internal remake rate is extremely high—approximately 30% on ceramics—but our remake rate outside is about 0.1%," Rensburg says. "It creates consistency for our clients. Layers of management are expensive, but that is the only way to do it."

There may be several ways to reach that point, but everything starts with having an eye toward improving your business.

"It is important to continue to reinvest in your business, regardless of whether you want to transition out or continue to grow it yourself," Zick says. "Far too often, laboratories reach a point at which they are not sure which way they want to go, so they do not do anything. That is a killer for a laboratory. Continue to reinvest in your business and try to grow. Be aware of the latest technology and materials, and make sure you are doing everything possible to give your clients what they want and need to stay competitive."

Reference List

Access the references for this article by going to insidedentaltech.com/idt926.

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