Turning the Tables

The outsourcing trend almost killed Kalexsyn--until its founders made globalization work in their favor.

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The timing could not have been worse for Robert Gadwood and David Zimmermann. After being laid off by drug giant Pfizer in 2003, the scientists founded Kalexsyn, a chemical research company in Kalamazoo, Michigan. Kalexsyn's plan was to help large pharmaceutical companies create new drugs by examining thousands of molecules to pinpoint the ones that had medicinal potential. But by the time Gadwood and Zimmermann built a lab, bought equipment, and hired 10 employees, the strategy had become obsolete. "All of our customers disappeared," Gadwood says.

The problem was that many large pharmaceutical companies had begun to farm out much of their early-stage chemistry research to cheaper labs in places such as India and China, where prices were one-third those of Kalexsyn's. At sales call after sales call, potential clients would say, "If you can match the cost of an Indian chemist, we'll talk to you," Gadwood says. Gadwood and Zimmermann needed a new plan fast.

Rather than compete with low-priced foreign competitors, the partners decided to make globalization work in their favor, by shifting their focus to the billions of dollars in business being outsourced from foreign countries to the United States. Outsourcing, which almost killed Kalexsyn before it even started, has proved to be the company's salvation. About 25 percent of the company's annual revenue comes from Western European clients, and sales are on track to increase by 60 percent, to $2.4 million, in 2006.

With all the dire talk about business going offshore, it's easy to forget the ocean has more than just one shore. That's particularly the case when it comes to services. American companies actually export far more in services than they import; indeed, the country posted a trade surplus in services of $58 billion in 2005, according to the Bureau of Economic Analysis.

That surplus shows no signs of diminishing anytime soon, says Daniel Drezner, an assistant professor of political science at the University of Chicago. While price is important, it's not the only factor in landing business, he says. "Quality still matters, and in this American companies have a tremendous advantage," he says, particularly for goods and services that require high-precision, high-quality production and well-educated workers.

The challenge for U.S. companies, of course, is finding customers for whom price is not the deciding factor. Both Gadwood and Zimmermann agreed that smaller biotechnology outfits were a good starting point because those companies can't afford to send scientists to supervise research in developing nations--a common practice among pharmaceutical giants.

At the same time, Zimmermann began to think bigger. At a science conference in Paris in late 2003, he met a representative from the city's economic development authority who told him about several French biotechs that were eager to outsource to the U.S. A few days later, Zimmermann followed up, and the representative introduced him to a handful of biotech executives. Not only was there demand for Kalexsyn's services, but, because of the dollar's weakness against the euro, the company's prices were considered affordable. Zimmermann began to formulate a plan to take advantage of the opportunity.

Gadwood wasn't entirely convinced. "Why would a company in France want to outsource to the United States?" he wondered. But Zimmermann was confident he could make a case in France and eventually throughout Western Europe. "Go ahead, prove me wrong," Gadwood told his partner. So while Gadwood focused on business operations in the U.S., Zimmermann dusted off his French, found a short-term apartment rental in Paris, and started scheduling appointments.

"Opening the first door was the hardest," Zimmermann says. "European companies tend to rely on the references of people they trust."

For the first six months, it seemed Gadwood's instincts were dead-on. Zimmermann was surprised to learn that many biotechs in Europe farm out research to universities. Even worse, he had a hard time getting meetings with the decision makers at companies. He was a complete unknown, and the fact that he was American didn't help matters. "Opening the first door was the hardest," Zimmermann says. "European companies tend to rely a lot on the references of people they know and trust."

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