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Growing Nervous

For Inc. 500 CEOs, the bottom line is growing -- but so is the anxiety. How long can successful companies fight a troubled economy?
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You could call Bill Oesterle a member of the worried well. And he's got company: many of the 270 other chief executives of Inc 500 companies who answered a recent survey about the entrepreneurial economy. Most of this crew have seen healthy growth at their businesses this year. They expect to do even better next year. But their outlook hardly counts as blind entrepreneurial optimism; indeed, most seem to be watching today's economic and political news and nervously shuddering. In what could be a summation of the group's ambivalent sentiments, Oesterle, CEO of the Indianapolis company Angie's List, wrote, "Things are going very well for us, but we are very cautious with expenses and very conscious of the companies around us that are not as fortunate. There but for the grace of God go we.... "

On the face of things, Oesterle and most of his fellow Inc 500 CEOs would seem to have little to worry about. Sales at Angie's List -- Oesterle describes it as a Consumer Reports about service companies -- should grow more than 68% this year, to $4.2 million. Profits are up, too, and Oesterle thinks that next year will be just as good. So it is with other survey respondents. About 7 out of 10 say that this year's revenues will be up over last year's, with many foreseeing a better-than-20% boost. Nearly as many expect this year's profits to grow, too, and almost 9 out of 10 expect both sales and profits to rise next year. As for job cuts, the worst in this sector may be over. Although about one-third of respondents said they had laid off employees this year, only a few plan layoffs for the first quarter of next year. The vast majority expect to expand their payrolls.

Nor is it just the Inc 500 companies that are doing well; the positive picture seems to extend into the rest of the entrepreneurial economy. CEOs of 402 fast-growing companies surveyed by PricewaterhouseCoopers (PWC) in September said they remained confident that their own companies' sales would continue to grow -- by 13% this year, about the same annual growth rate that they had predicted in a second-quarter survey. Add to that some good news from Arc Analytics president David Birch, the researcher who created and maintains the "gazelle" database, which consists of entrepreneurial companies that grow at least 20% annually for four straight years. Last December, Inc reported that the population of gazelles had for the first time declined. Birch was both surprised and alarmed; he had never seen a decline in that group, he pointed out, and maybe we couldn't expect gazelles to help pull us out of the recession this time around. But today the decline has reversed itself, and the gazelle population is up by 23%.

Though the numbers look good, few of the CEOs surveyed by Inc or PWC act as if they've just received a clean bill of health. Greatly concerned about ongoing weak demand for their products and services, the CEOs surveyed by PWC are only cautiously hiring and spending. (PWC notes that, not surprisingly, that very caution is likely to prolong the economic slowdown.) The skittish Oesterle, for instance, has created cost-cutting contingency plans, even putting his $2-million advertising budget into the mix of items that could be trimmed. And this year -- his seventh in business and his best yet -- is the first in which Angie's List won't open any new markets. (The company operates in 13 cities, and its business is local to each metropolitan area.) "We just do not want to get hung out with extra burn in case something were to go wrong," Oesterle says. "Maybe we're being too afraid of our own shadow here, but it just seems like things are going well, so let's not muck it up."

Other survey respondents sound a similarly conservative note. Some say they'll operate with leaner staffs than in years past. Others are postponing capital expenses or cutting overhead. Jeff Stephenson, CEO of Bennett & Curran Inc., a $2.5-million wholesale distributor of books in Englewood, Colo., says, "I don't want anything purchased by anyone in our company unless it has to do with driving our business forward." Stephenson, whose sales were flat this year, has shrunk spending on everything from magazine subscriptions to Internet costs to shipping. He has even reduced his own compensation and that of his two management- level employees by 15%.

Look more deeply at the survey responses and other data, and you can see some of what's behind the worries: Although 7 out of 10 CEOs in the most recent survey forecasted revenue growth this year, that's slightly fewer than the previous quarterly survey showed. If a true recovery had taken hold, that number would have increased.

The macroeconomic signs look threatening. After indications of an impending recovery midyear, the economy "hit an air pocket" in September, says Mark Zandi, chief economist at the research company Economy.com Inc. That didn't go unnoticed by Inc 500 CEOs: 61% feel that we're still in a recession, and 78% fear a looming slowdown in consumer spending. What's more, three-quarters of those who feel we're in a recession call it moderate to severe -- up from about half in our last survey.

Moreover, the microeconomic signs seem portentous. Insurance costs are rising. (See " Cost Cutting II" section.) It's hard to find new customers and new capital. Smart CEOs keep an eye on their own markets -- and many aren't liking what they see. Oesterle, for instance, watches the sales at Lowe's and Wal-Mart stores; when their sales are up, so are his, and both had been doing exceptionally well for the past two years. But "watching Wal-Mart miss their sales expectations this quarter makes me uneasy," he says. He also tracks the economy by following the activity of 100,000 service providers -- plumbers, carpenters, and so forth -- who advertise with his company. "All of a sudden in June these independent guys who have had 13-week backlogs for 10 years said, 'We're looking for work," says Oesterle, revealing yet another sign of an impending consumer-spending downturn.

And confidence isn't exactly high. A brutal stock market. CEOs in handcuffs. A dicey situation in Iraq. The perception that things are bad all over is part of a vicious cycle: as the perception grows, confidence wanes, and as confidence wanes, the perception grows. Says Zandi: "The prospects that this recovery is going to evolve into a more sustained expansion seem poorer and poorer. Investor, business, and consumer confidence -- every one has grown increasingly dark."

So there you have it: the worried well, facing a situation that isn't too bad but isn't exactly hunky-dory, either. Which raises the question, How do you manage a fast-growth company in confusing times like these?

Some answers from the Inc 500: Trim costs (including that biggest one of all, health insurance) -- but intelligently. Learn how to grow without outside financing. And, oh yes: jump on the opportunities that a recession provides. There are more than you'd expect.


Cost cutting I: The scalpel, not the meat-ax

It was Mark Comiso's gloomiest moment. His San Francisco-based interactive marketing agency, Maus Haus Inc., was down from a high of 50 employees to 8. Short on revenues, the company had high fixed costs, including rent for office space, furniture, and computers. But Comiso refused to give up. "I told my partner, 'We can't go out of business -- we wouldn't find a job!' "

Instead, Comiso slashed his expenses, just as almost one-third of our survey respondents are planning to do next year. But he did so with a rapier, not a bludgeon.

At Maus Haus, the most important choices centered on the staff. With his revenues dropping from $2.6 million in 2000 to $2.3 million last year and even less in 2002, Comiso knew he had to cut people. Despite the expense, he saved a handful of senior staffers. "A lot of companies went right at the top -- they cut senior designers and senior programmers because they get the biggest salaries. But you wind up with a dichotomy: you sell with the A team -- the partners -- and deliver with the B team." To make the finances work, he asked the remaining employees to work half-time for half pay, and he and his partner took 75% salary cuts. In return, he encouraged the new half-timers to freelance on the side. That arrangement lasted for about six months, until last spring, when the market picked up. Today all the staffers -- now 14 people -- work full-time.


"We just do not want to get hung out with extra burn in case something were to go wrong. Maybe we're being too afraid of our own shadow here, but it just seems like things are going well, so let's not muck it up."

Shrink expenses too far, of course, and you deprive a company of its lifeblood. Like almost half of the CEOs who responded to the survey, Comiso is now carefully growing his marketing budget. His goal: to keep $1 million worth of potential business in the pipeline at any one time. He's upgrading the company's Web site, spending $20,000 on a new CD-ROM sales piece, and producing direct-mail promotional material. Although Comiso won't hire new in-house salespeople, he may recruit commission-only sales help from the vast quantity of laid-off advertising professionals.

For Comiso, saving pricier employees was the right choice. "When we did get clients, we were still able to deliver, and that has allowed us to come through this forest fire and survive," he says. Now it's time to invest again. "We still have to get our name out there and create brand awareness."


Cost cutting II: Reining in health care

Health insurance: it can make you sick. Nearly all our survey respondents are concerned about today's rise in rates; about 60% report that they're "greatly concerned." How much do they think rates will go up? More than 70% of the CEOs surveyed expect total insurance costs (including health, vehicle, and workers' compensation insurance) to rise 10% to 25% in 2003. Another 20% of respondents expect the costs to rise 26% to 50%.

For some companies, the increases have already begun. Take Legacy Financial Group Inc., a $6.9-million mortgage-services company based in Arlington, Tex. Legacy's health-care costs are more than twice what they were only three years ago. The company's 2002 premiums are up 50%. Anticipating an increase of another 40% for 2003, CEO Chad Bates decided radical measures were in order.

One step was to increase the portion paid by employees, a common tactic. But given the competition for good people in the red-hot mortgage industry, Legacy had to absorb most of the increased costs itself. "Because of lower mortgage rates, business has been brisk," says Bates. "So we have to provide benefit programs that can compete with those at larger banking institutions, or we lose key employees."

So, like 60% of our survey respondents, Bates has been searching out lower-cost alternatives to his company's present coverage. This year he and his wife, Joy, who is Legacy's controller and human-resources director, solicited bids from 20 insurance companies. MAMSI Life and Health Insurance Co. -- which happened to be a client of Legacy's D.C. office -- submitted a quote significantly lower than those of the competition and ultimately enabled the Bateses to keep costs flat for employee-only coverage, while employee-and-family coverage actually decreased 13%.

Of course, the process was not without costs, particularly the three months that Chad and Joy spent researching and soliciting bids. But Chad plans to repeat the bidding process every year. "We're leaving money on the table if we don't," he says. "We've been in business more than 10 years and only changed carriers twice up until this past year. Now we're going to have to keep changing."


Tune up now for growth later

With parts of the economy in a morass, many workers' spirits -- and energy -- are also in a trough. About a third of our respondents said that "keeping employees motivated and focused" had become more difficult. So they are tuning up their companies and improving performance -- a task often neglected when times are good.

Just ask John Metzger and James Clark, CEO and chief operating officer, respectively, of the Boulder, Colo., public-relations firm Metzger Associates. The company was flush in 2000. But by 2001, as its high-tech clients began bleeding, revenues dropped from $3.5 million to $3.3 million, and the company lost money. Trying to choose which of several valuable employees to lay off, Clark and Metzger realized they had to decide on gut instinct. They had poor systems for tracking critical information and performing employee reviews, and they had only handshakes and paid bills as proof of client satisfaction. In the fall of 2001 they started developing a balanced-scorecard effort, a new performance-evaluation process, and a quality-assurance program, which they rolled out over the past year.


"In this market, you try to increase market share, because other companies aren't in the mood. This is the time that company owners should realize that their competitors are distracted, worried, not working hard."

This year the company expects revenues of about $4 million. Although they're operating on thin margins, Metzger and Clark believe investing in those programs will pay off quickly with happier employees, increased revenues, and, by 2004, 15.5% profit margins, up from the industry's standard of 12%. "We want to be a creative company," says Clark. "Reactive companies let all of the external factors impact their processes. Creative companies look internally and say, 'Let's take a look at our situation. How can we improve upon that?' "

Like Clark and Metzger, Matthew Ohrnstein is proactive in down times. The CEO of Caliber Collision Centers, a $220-million chain of 68 repair shops in California and Texas, Ohrnstein is rolling out a 6- to 18-month development program for his store managers in hopes of readying them for even greater growth and profitability when the economy picks up.

For Ohrnstein, improving employee performance is all-important. "At any point, we have 20 stores firing on all cylinders, 35 that are acceptable, and the rest at some level of remediation," he says. "If you could just pull up the ones that are average to be excellent, and the ones that are acceptable to be average, that has an impact on customer satisfaction. And that's the key driver to profitability."


Opportunity knocks -- if you're home

John McMillan, an engineer-turned-CEO, is a low-key kind of guy. You can't help liking him, but you'd love to hate him, because McMillan, CEO of Wise Solutions Inc., a software company in Plymouth, Mich., is a glutton at the feast of opportunities served up by the recession. His company has grown by an average of 42% annually in each of the past six years, with typical profit margins of 25% and no debt. This year McMillan hired 30 employees, jamming his offices with 100 people. No problem. "We moved into a larger building during this downtime," he says. "The lease we got was awesome."

Not envious yet? Try this: McMillan bought mahogany furniture for 5 cents on the dollar. More strategically, he's increasing spending on research and development and is looking for acquisitions. "In this market, you try to increase market share, because other companies aren't in the mood," he says.

His strategy is so commonsensical that you wonder why everyone doesn't chase opportunities in a slowdown. So does McMillan. He thinks most executives are paralyzed by the same kind of anxiety that incites investors to sell stocks when prices are low. "This is the time you think [company owners] should be realizing that their competitors are distracted, worried, not working hard. But somehow they don't think that way."

Bill Oesterle, CEO of Angie's List, is another one who does. He negotiated a 15% discount on $2 million worth of advertising and 12% off the cost of printing 100,000 publications a month.

What does it take to turn a recession to your advantage? A debt-free company with decent cash flow helps. But the right attitude may be more important. "One person sees a brick wall," says McMillan. "And I go, 'What can I do with that? Can I market that brick wall?"


Elaine Appleton Grant is a senior editor at Inc. Senior associate editor Christopher Caggiano provided reporting assistance for this article.


Slowdown? What Slowdown?

Everybody's worried, right? Well, not everybody. Asked about the mood at their companies, nearly a quarter of Inc 500 survey respondents checked the box that said "Fantastic ... we're going great guns." Explain that if you can.

Part of the explanation lies in the overall economy, which itself is sharply fragmented by industry. Health care is doing well. So are educational services, along with mortgage banking and everything else related to housing. "But," says economist Mark Zandi of Economy.com, "that's it. If anyone else is telling you the world is good, it's because they're taking market share from some behemoth."

And maybe that's the rest of the explanation. Take Topics Entertainment, which publishes educational and reference software, such as World Book encyclopedias and Rand McNally maps. CEO Greg James says that retailers like Best Buy and Circuit City have made Topics their vendor of choice, so his success has come at the expense of other software companies. Thanks to such market swiping, James expects Topics to grow from $22 million in 2001 to $35 million or more this year.


Optimistic ...
How do you think your 2003 revenues
will compare with 2002's?
Up more than 20% 49%
Up 20% or less 41%
Flat or down 10%
How do you think your 2003 profits
will compare with 2002's?
Up more than 20% 40%
Up 20% or less 47%
Flat or down 13%

... But Nervous
Based on your experience, does it feel
as if the economy is in a recession?
Yes 61%
No 39%
Are you worried about a slowdown
in consumer spending?
Extremely worried 13%
Somewhat worried 65%
Not worried 22%

To-Do List: 2003

Which activities do you expect will remain difficult
or will become more difficult in 2003?
Winning new customers 43%
Collecting accounts receivable 29%
Keeping employees motivated and focused 27%
Raising capital and getting financing 26%
Retaining existing customers 16%
Retaining valuable employees 13%
Other 7%

As the economy picks up, how will you
run your business differently?
Increase sales and marketing expenses 46%
Run with leaner staff 35%
Reduce overhead expenses 28%
Reduce compensation or benefits 13%
Cancel or postpone capital investments 12%
Reduce sales and marketing expenses 6%
Do nothing different 30%

Note: Respondents could choose multiple answers.

For this project Inc teamed with Inquisite, the survey product group of Catapult Systems, an Inc 500 company. Inquisite (www.inquisite.com) provided the survey technology, reporting, and hosting for the on-line survey.


Please E-mail your comments to editors@inc.com.

Last updated: Dec 1, 2002




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