Cloudy, With a Chance of Monsoons

On the other side of the ledger, economic conditions aren't nearly as grim as they were in times past. And unlike in the 1970s, the U.S. economy now includes a large group of entrepreneurial companies run by seasoned CEOs, and many of those company builders are optimistic about their ability to create growth even in the midst of a recession. Whistling past the graveyard? Maybe. But even in a downturn like this one, Inc 500 CEOs largely outperform the economy. For the first half of this year, Inc 500 companies grew by 16% over the first half of last year -- four times the growth rate of the gross national product. And both the distressed companies and those that are still healthy have already begun taking steps calculated to regain (or preserve) their momentum.

CEOs of distressed companies, for instance, have embarked on sharp programs of cost control. They have laid off staff and renegotiated fixed costs, from lease payments to Internet access. They've eliminated perks and slashed their own salaries. "We put everything into two buckets, the 'have to have' bucket and the 'nice to have' bucket -- and we really cut that," says Jim Nall, president and CEO of Paladin Data Systems, a $10-million software-development company in the Seattle area. Expense cuts plus a 20% layoff will save Paladin nearly $3 million this year, a whopping 50% of its overhead. Paladin has also renewed its emphasis on that most basic of business activities: making a sale. "I'm full-time sales again," says Nall. "We couldn't afford to have the founders sitting around in offices making strategic-vision decisions."

The real trick for any company, of course, is to tighten up for a worst-case scenario, push for increased sales, and develop new opportunities, all at the same time. Tom Dodge, CEO of Advanced System Integration, an Austin company that develops factory-automation systems, has slashed payroll from 100 to 62 and is quoting jobs tighter because the semiconductor and telecom plants he once serviced aren't buying as much as they used to. But he's also increasing his visibility in the not-so-hard-hit food and pharmaceutical industries, hoping to generate new revenues there.

As for healthy companies, some are healthy precisely because they have carved out niches that are somehow protected from a downturn -- always a shrewd entrepreneurial strategy. U.S. Energy Services, in Wayzata, Minn., analyzes customers' energy use and finds ways for them to save money. "In good times we come in and say we can offer about $200,000 in cost savings, and they say, 'We don't have time to focus on that," says CEO and president Bill Bathe. "But in a slowdown, $200,000 gets their attention."

And many healthy companies have benefited from good old-fashioned smart management, opting for astute diversification, avoiding overextension, and conserving cash. Arthur Bedrosian, president of Zephyr Environmental Corp., in Austin, describes his job as recession-proofing his company. He has deliberately set out to serve customers in markets as diverse as consumer goods and energy production. "When one is down, the other is often up," he says of the two sectors. Bathe believes every company should have at least a few months' worth of cash readily available. "Just-in-time inventory for auto parts is fine," he says. "Just-in-time cash is not."

Small steps, no doubt. But the big economic picture is made up of a thousand little ones. And when the slowdown ends, as they all do, growth will go to those who have prepared themselves well. "What should you be doing in running your business?" asked Warren Buffett of his "all-star" managers in late September. "Just what you always do: widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs. With the exception of insurance pricing and coverages, almost all operating decisions that made sense [before September 11] make sense today."

Inc staffers who worked on this special report include contributor John Case, senior editor Elaine Appleton Grant, senior writer Susan Greco, reporters Jill Hecht Maxwell and Kate O'Sullivan, senior staff writer Mike Hofman, Inc Technology executive editor Christopher Caggiano, senior editor Susan Hansen, senior staff writer Emily Barker, and associate editor Thea Singer. The survey data were collected over the Internet using Inquisite by Catapult Systems ( www.inquisite.com). Send your E-mail to editors@inc.com.