Paths to Growth Through Disruption
By Brian A. Colao
Director, DSO Industry Group at Dykema
2025 Midyear Update
Around the middle of 2022, the DSO industry experienced extremely challenging economic conditions, including high interest rates, high inflation, high cost of supplies and equipment, and high costs of labor—along with labor shortages. This resulted in a severe slowdown of the previously white-hot M&A markets and caused many DSOs to significantly reduce expenses and downsize their workforces to offset the much higher costs of doing business.
2024 Year-End State and Predictions
However, 2024 ended with cautious optimism that the three interest rate cuts in the fourth quarter would boost business. The market also anticipated a new presidential administration that would adopt economic policies that would lead to significantly lower interest rates, end the current wars and global unrest, create a more favorable regulatory environment, and reignite the DSO M&A markets.
My end-of-year 2025 prediction was that the first quarter would not see significant M&A activity but that the markets were poised for a rebound in the third to fourth quarters, assuming that the new administration was successful in its stated policies. In the meantime, I predicted that DSOs would focus on same-store growth and were well positioned to invest in new innovative technologies in 2025.
2025 Reality
The year 2025 got off to a very momentous and, at times, tumultuous and economically disruptive start. The new presidential administration came right out of the gates with very aggressive and almost unprecedented trade policies that included the implementation of significant tariffs against China, Canada, Mexico, Europe, and most of the developed world. Some tariffs were seemingly implemented and then suddenly postponed after a few days on numerous occasions, often in direct contradiction of public statements made by government officials.
This has led to severe volatility in the U.S. and foreign stock markets and created further economic uncertainty. In the first quarter, inflation inched up and then inched down but remained far above the threshold for significant interest rate reductions to occur. Therefore, as expected, there were no interest rate reductions in the first quarter, and the M&A markets remained slow and stagnant.
Current Outlook
As of the time of this writing, the first six months of 2025 have gone by, and some are predicting that the cost of dental supplies and equipment may go up significantly in the weeks ahead, which would put further pressure on DSO profit margins. In addition, the Russia/ Ukraine war has not been resolved, and the conflicts in the Middle East have recently intensified, with no immediate resolution in sight. All of this has resulted in very limited M&A activity through the second, and likely, the third quarter.
One silver lining is that it appears that most of the world is interested in quickly resolving tariff issues. If issues are quickly resolved, along with at least a path to resolution of military conflicts, then we could be well positioned for fourth-quarter interest rate reductions and a vast improvement in the M&A markets, with 2026 looking like a big rebound year.
Technology Update
In response to ongoing economic pressures and labor shortages, DSOs are significantly increasing their investment in innovative technologies in 2025. These advancements are helping organizations streamline operations, improve patient outcomes, and enhance competitive positioning.
Cloud-Based Practice Management Systems
DSOs continue shifting from legacy systems to robust, cloud-based PMS platforms. These systems centralize data, facilitate real-time information sharing across multiple locations, and include advanced capabilities like automated insurance claim adjudication. This automation reduces administrative workload, accelerates reimbursement cycles, and improves cash flow—critical advantages in tight economic conditions.
Diagnostic AI
Diagnostic AI tools have become integral in clinical practice, assisting clinicians by identifying conditions such as early-stage caries, periodontal disease, and oral cancer indicators from radiographs and intraoral images. This AI-driven precision improves clinical outcomes, increases patient trust, boosts case acceptance rates, and helps DSOs maintain high diagnostic standards, even with less experienced clinicians.
AI-Augmented Revenue Cycle Management
AI-driven revenue cycle management (RCM) tools are optimizing the financial workflows of DSOs. These solutions handle tasks such as insurance eligibility verification, claims submission, and remittance processing automatically. AI platforms also predict and flag potential claim denials in advance, significantly reducing payment delays and improving operational efficiency by allowing human teams to focus on complex billing issues.
AI-Enhanced Patient Acquisition and Retention
To effectively attract and retain patients, DSOs are implementing sophisticated AI-based marketing and engagement tools. AI-driven platforms enhance patient interactions with 24/7 chatbots, automated follow-ups, and digital appointment scheduling. Additionally, call analytics solutions are converting more inquiries into appointments by flagging missed opportunities and providing actionable insights in real time, increasing patient satisfaction and revenue.
Innovative Patient Financing Solutions
Economic uncertainty has made innovative financing crucial for patient treatment affordability. DSOs are increasingly adopting embedded finance solutions, which integrate financial services directly into the patient care experience. Embedded finance simplifies financing processes, enhances patient convenience, and significantly increases case acceptance rates.
Additionally, DSOs are utilizing fintech-driven tools that offer real-time financing approvals and flexible payment options, including “buy now, pay later” plans. These solutions are making dental care financially accessible and attractive. Economic uncertainty has made innovative financing crucial so patients can afford treatment.
Revenue Streams
DSOs are expanding revenue through specialty services and new products. Clear aligners, implants, and anchored dentures are now routinely integrated into general
practices, increasing patient spend per visit. Membership and discount plans attract uninsured patients and generate predictable, recurring revenue. Additionally, sales of
professional-grade teeth whitening and novel enamel regeneration products have become profitable service extensions.
Cost-Savings Tactics
To offset rising costs, DSOs are increasingly consolidating lab services and negotiating group-level agreements to achieve economies of scale. They are also rigorously reviewing merchant and vendor contracts to reduce expenses such as credit card processing fees and compliance-related charges. These proactive efforts deliver substantial bottom-line savings, essential during economic volatility.
Strategic Outlook
By strategically adopting these technologies and operational innovations, DSOs are positioning themselves not only to survive current economic uncertainties but to thrive. Organizations investing now are expected to lead the industry’s recovery and future growth, highlighting the transformative potential of technology in modern dentistry.
