You think you've got problems? Imagine trying to turn around a company that's losing half a million dollars every month.

Ten years ago, John Koehler came upon what seemed like a great opportunity. A network hardware company had gone bankrupt, and the bankruptcy court was auctioning off its assets, including the service division that provided for installation and maintenance of networks. Koehler had decades of experience as an entrepreneur and executive in data networking, and he knew the company's engineers were top-notch. So he persuaded some investors to go in with him, and he bought it. They named the new independent entity VITAL Network Services, with Koehler as president and CEO.

"You should think twice before buying a company at auction," he says now. "When you buy something in bankruptcy court you don't get to do a lot of due diligence. You buy and then you have to figure out what you bought--and it was quite a bit worse than I was expecting."

The company was piling up its $6 million annual losses on revenue of just $14 million to $15 million a year, he says. "It was ugly. The second year we had to put more money in."

Though he thought hard about simply shutting down, Koehler decided he would save Vital Network Services instead. Here's how he did it:

1. Be ruthless about cutting costs.

Vital Network Systems' biggest asset was its people, but they were also its biggest liability. Specifically, there were too many full-time employees, particularly lone engineers in offices around the globe who lacked enough work to fill their time. "The international offices might have made sense when it was part of the hardware company, but they were creating about two thirds of the losses," Koehler says.

He completely shut down the international operations, which reduced losses to about $2 million a year. Then the company went through a careful analysis of its full-time staff within the United States and made some drastic cuts there as well, using the IT staffing marketplace OnForce to hire contractors as needed where the company no longer had offices, or to augment its workforce where it did. That move helped control costs a lot more, Koehler says.

2. Don't be afraid to change your customer base.

Vital Network Services fired many customers when their contracts expired for a simple reason: Koehler knew the company needed to dramatically change its customer base. "The market we were going after would be fine if we were a manufacturer, selling services behind hardware sales," he says. "But our business now is we don't sell hardware; we provide infrastructure services."

That's a tough sell to corporate executives who might not want to think that deeply about how a networking system is maintained, once they've purchased it. And so, Koehler knew, the company needed to stop selling to corporate customers and start selling to resellers, companies that did sell network equipment for the big manufacturers, and might want to add installation and maintenance to the package.

As a result, he says, "We had to fire most of our customers and get new ones. That's a hard thing for any company to do, but it wasn't going to make sense otherwise." Since the company's sales force was expert on selling to corporate clients, he had to make some changes there too. "We had to get the right salespeople selling to the right market," he says.

3. Be completely transparent.

"We're a service business and service is about people," Koehler says. "Having bad morale and people scared they might get laid off tomorrow doesn't go well in a service business."

Koehler says he took several steps to help morale during this time. "Chief among those was communications. They knew the things we did, we had to do so that everyone wasn't at risk. We explained, "Here's why we're doing what we're doing and why it won't affect you."

Koehler says he likes to push transparency to the limit. "I over-communicate to the point where my CFO says, 'Do you really want to tell them that?' But it's all about those people." Honesty, along with bonuses and gifts of stock, helped Vital Network Services keep its best people in place during those days of uncertainty.

All these tactics paid off. Vital Network Services broke even in 2006, and has been profitable every year but one since then. Koehler's vision that the company was a good opportunity is finally a reality.

"It's important not to try to sell your way to profitability," he says now. "You need to find a way to be profitable with the sales you have and then innovate to add incremental business past that. If you're profitable where you are, then any growth becomes wonderful."