Mark Tierney's company was barely up and running when his primary market all but collapsed.

Tierney had left his job as chief executive of a subsidiary of United Healthcare in 1993 and started Network Management Services (#63 on the Inc. 500), or NMS, to pursue a vast new opportunity in the delivery of medical services. The Clinton administration's effort to reform the health care industry was leading to the creation of local alliances of purchasers who would negotiate favorable rates with medical providers. Tierney's new company, in Minneapolis, secured contracts to support the administrative-technology needs of two of the first six alliances formed, called health insurance purchasing cooperatives.

When political support for the Clinton plan deteriorated, it became clear that Tierney's once-promising market of alliances was not going to grow. Tierney moved quickly to redirect his focus, which not only saved NMS but also exposed an opportunity that has turned NMS into a $7 million company. "What was a devastating blow was, in retrospect, a fortuitous positive event for us," he says.

Tierney's experience is not uncommon. Many entrepreneurs start companies in industries undergoing major change, which enables the entrepreneurs to capitalize on new opportunities. But the market can move quickly and unexpectedly in new directions, leaving Tierney and others like him with a formidable challenge: either adapt or die trying.

Tierney adapted. In order to serve a market of health care alliances, NMS had developed a software system to manage the relationship between employers who purchase health care services and suppliers of those benefits, including health maintenance organizations and other managed-care vendors, indemnity insurers, and dental services. NMS designed the system so that it would offer maximum customer service by producing premium price quotes, managing complex membership data, distributing data and payments to health care suppliers, and producing health care performance "report cards" involving many buyers and suppliers.

When Clinton's push on alliances reached a dead end, Tierney looked at other markets that might welcome his company's expertise. "I think it's very important for small companies to have a generic sense of who they are," says Tierney. "You don't want to get labeled too narrowly. You want to shift to meet client demand." Tierney shifted his focus to winning business from Fortune 500 companies with multiple business locations. His message to potential customers: Although it may seem easy to contract with a brand-name insurer who can offer medical coverage in every major market in which the buyer maintains offices, health care is a fragmented industry in which the most cost-effective and best care may be offered by local providers. It might be beneficial, Tierney argued, for large companies to use many health plans throughout the country.

Tierney's software was already robust enough to handle such complex arrangements. It patches together for big companies a quilt of local health plans through the establishment of electronic data "pipelines," which manage the flow of eligibility data as well as track payment reconciliations. "Employees want choice," says John M. Nehra, a general partner at New Enterprise Associates, one of two venture-capital firms that invested a total of $5.5 million in NMS. "They don't want Prudential, take it or leave it. It doesn't work to sign up with one plan. You have to optimize it in each market. Employees want several choices in their market."

Cereal giant Kellogg Co. provided a breakthrough for NMS when it signed on as a customer of the year-old business, in 1994. Northwest Airlines came on board the following year. "Our early setback," reflects Tierney, "required us to scramble hard."