Trading in For a Newer Model
Posted Apr 28, 2011 in Management
Two U.S. laboratory owners re-think their business models to incorporate separate businesses dedicated to offshore outsourcing.
When outsourcing of dental restorations first came to widespread attention, the laboratory industry was divided between those who spoke out against it and those who embraced it as a logical progression in today's global marketplace.
While "offshore" is still a dirty word to many--56% of respondents to a recent LMT e-poll remain opposed to it--a growing number of laboratory owners are viewing offshore outsourcing as a viable business strategy. Some are outsourcing to complement their U.S. staff and services, while others are sending all of their work offshore. And--as LMT has discovered--some are more willing than others to discuss their offshore business openly.
This month, we talk to two laboratory owners who are upfront and enthusiastic about what offshore outsourcing has done for their businesses. In fact, they've re-invented their business models and created separate companies--with different names, employees and accounting--to do business with laboratories in China. While they remain committed to growing their U.S. laboratories, their international businesses allow them to derive benefits they say only offshore can offer.
BioComp Dental Laboratory/Cornerstone Dental Laboratory; Ivyland, Pennsylvania
As offshore outsourcing became more widely used in our industry, John Collins, like so many laboratory owners, was experiencing a dramatic decrease in single-unit posterior restorations. "We were losing our bread-and-butter," says Collins, CDT, MDT, owner of seven-person BioComp Dental Laboratory. "Most of our customers are fee-for-service but some do accept insurance patients to augment their schedules. Quite simply, we were losing that work."
Collins was feeling pressured by some of those dentist-clients to negotiate his pricing structure, but he wasn't willing to do it. "We have a new facility, benefits packages for our employees just too many expenses," he says. "BioComp just couldn't compete in the value-priced arena."
At the same time, Collins' long-time friend, Tom Anderson, was encouraging him to consider offshore outsourcing as a means of providing a more economical alternative. Despite the fact that Anderson had nearly 20 years' experience working with laboratories overseas and was skilled in the process, Collins was resistant at first. "I didn't think that offshore outsourcing was right for me," he says. "But the more we talked and the more I researched globalization in other industries, things fell into place." In 2005, Collins partnered with Anderson to open Cornerstone Dental Laboratory, which is dedicated to offshore outsourcing and works with three laboratories in China. Although in the same building as BioComp, Cornerstone functions as an entirely separate business.
This new venture gave Collins the opportunity to answer price concerns with a "value line" of restorations--fabricated offshore--to complement BioComp's premium service. "All of my BioComp customers know that if they check the 'value' box on the prescription form, it will go through Cornerstone and be fabricated overseas," says Collins, who estimates that the value line is priced 25% to 30% lower than his regular services, depending on the restoration. "The quality is very good; clearly it's not the same as we do at BioComp because the technicians in China don't have the same understanding of our clients that we do."
The value line makes up less than 20% of BioComp's workload, and dentists usually reserve using it for the simpler cases. However, when a more complex implant, attachment or anterior case comes in prescribed as a value product, Collins contacts the dentist. "I let them know that it may be fine going to China, but I don't have total control," says Collins. "It also comes down to knowing your client and his expectations. Sometimes I have to intervene to ensure they get what they expect."
Adding the value line has also allowed BioComp to win back some former customers. "We told them, 'If you enjoyed working with us and it's just a matter of price, then here's an option: use the offshore service and know that since we manage it, you'll get good consistency at a value price," says Collins. "We got back some big accounts that would have never returned otherwise."
In addition to the increased business from current and former dentist-clients, Collins also saw another market for Cornerstone: being a broker for other U.S. laboratories wanting to take advantage of offshore work without handling the logistics or incurring the high shipping costs. And that opportunity panned out. The vast majority of Cornerstone's work comes from other laboratories with just a small number of local dentists using the service directly.
According to Collins, dealing with laboratories is easier because the laboratories service their clients and just transfer customer information to Cornerstone. Also, the laboratories handle their own minor adjustments to casework if they're needed. "But we look at every single case before it leaves here and the majority do not need an adjustment," says Collins. "We expect the overseas laboratories to do their own quality control because when it gets here, the case has to be good to go. We're very satisfied with what we get."
Jesse & Frichtel Dental Laboratory/J.F. International; Pittsburgh, Pennsylvania
Just four years ago, Jesse & Frichtel Dental Laboratory was at a crossroad. Marketing would bring in new business, but--because of the shortage of technicians--there was never enough staff to handle the work. Deadlines were missed and problems weren't caught before cases were shipped to the dentist. Technicians felt stressed and overworked, leading to an us-versus-them environment. "To say that I hated coming to work every day is an understatement," says Mark Frichtel, owner of the 30-person laboratory.
When weighing his options--including leaving the industry altogether--Frichtel thought that by utilizing offshore labor for some cases, the laboratory could handle a larger volume of work and continue to grow. He also knew it could benefit his client penetration efforts. "The average dentist has an annual lab bill of $30,000 to $35,000, but at that time we were only getting about one-third of that from our clients," says Frichtel. "We addressed that with them and were told they needed more economical options for different types of patients."
In 2004, Frichtel established JF International, a separate company dedicated to offshore outsourcing. Frichtel negotiated with and tested nine laboratories in China, eventually choosing to work with three different ones both for their specialties and so that he wouldn't have all his eggs in one basket.
Frichtel wanted to be sure the international business was distinct from his U.S. laboratory so, in addition to a different name, he set up JF International with its own telephone numbers and prescription pads. Then, to test the waters, he marketed the offshore service outside of his local area and after proving successful, made it available to his local clients. JF International also outsources work for other U.S. laboratories, although 90% of its caseload is from dentists.
To service clients using the international division, there is a dentist on staff who performs quality control and is available to discuss technical issues. If a case needs to be remade or repaired, Jesse & Frichtel technicians take care of the problem so a doctor's deadline isn't missed.
The here and now
By offering an offshore product, Frichtel has been able to show customers that if they're looking for a more economical restoration, they don't have to go elsewhere to get one. "We offer one-stop shopping," says Frichtel. "Our clients can use our laboratory for everything from an insurance case to a patient who wants a metal-free, full-arch restoration."
Frichtel is well aware that he took a risk and that Jesse & Frichtel could have "lost" business to JF International. "I've been asked many times, 'Aren't you cutting off your nose to spite your face?'" says Frichtel. "Simply put, we are getting more business than we would if we had just one type of service."
But the new business model has done more than just build his bottom line. Because the simpler cases are going overseas, Jesse & Frichtel's technicians are not overburdened and they're focusing on more complex implant, attachment and CAD/CAM cases, which interest and challenge them more.
It's also given the laboratory more time to focus on areas that slipped through the cracks when they were overworked, like proactive customer service and quality control, and bringing its remake factor from 4.5% down to 2%. "I've gone from hating coming to work to feeling like we have a part in changing where the industry is headed," says Frichtel. "It's a lot more fun now."
The offshore debate continues
In an e-poll of 230 laboratory owners and managers, LMT asked: since offshore outsourcing first came to widespread attention, how have your feelings about U.S. laboratories sending work outside the country changed?
- 56% No change; I've always been opposed to it and still am
- 23% No change; I've always seen how it can be a viable business strategy for some laboratories
- 11% I used to oppose it but now see how it can be a practical solution for some lab owners
- 3% I used to support the idea but I'm less open to it now than I was before.
- 7% Other/Undecided
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