There is no way around it: these are troubling times. As our markets tumble and people increasingly live with fear and anxiety, organizations large and small are trying to re-tool what they do in order to exist in this new financial environment.

One of the greatest challenges during this period is figuring out exactly how to change or how to innovate when you’re up against the wall. Executives from across the spectrum, in public and private sectors, are asking the same question: How do you keep expanding your vision when your budgets are contracting?

This question certainly has weighed heavily on my mind these past months as Minneapolis, along with many American cities, faces significant financial challenges born out of a sluggish national economy and a roller-coaster state budget deficit.

Although Minneapolis has made major structural reforms that have put us on much stronger financial footing, the budgetary and financial challenges we face are significant, and we know we’re going to need to put everything on the table and make some hard choices that fundamentally redefine the services we provide.

Because I suspect that many of you are in a similar boat, I offer five quick thoughts about how to innovate during tough times:

1. Name the challenge. Many different factors are at play with the shifting sands of this economy. Effectively solving a market, budget or organizational challenge requires first defining the problem and its underlying factors.

2. Identify your core functions. As the City faces budget cuts, we have made the decision that existing in this new financial climate means doing fewer things than we do today, but doing them well. We will not try to do everything we currently do today, since with fewer resources we could not do everything as well as we do now. Maintaining quality services means cutting in places where you’re not growing and building capacity in places where you want to grow.

3. Cross boundaries, or better yet, knock them down. Being a chief executive means using the perspective of your position to see the big picture and connect the dots of seemingly unconnected pieces. As Minneapolis works to stem this recession, we are taking disparate functions of the city and seeing how they can cross-pollinate. For example, we are looking at how we can retrain workers to rehab foreclosed homes to get those homes back on the market, or how we can take unwanted dirt from construction sites to create community gardens on vacant properties.

4. Declare the status quo dead. In order to set the right tone for your organization, it is important that you declare loud and clear that the status quo is not an option. Insist that your leadership and employees understand that change is imminent, that change is good, and that change – large and small – starts with them.

5. Instill ‘seventh generation’ thinking. Some of the greatest thinkers of all time may well be the leaders of the Iroquois nations, who had the credo that leaders should base their decisions on the impact they have on the next seven generations. “Seventh generation” thinking sometimes means focusing on issues that are not as obvious, but are equally vital to future innovation. I highly doubt my tombstone will say “Helped pay down $90 Million in Debt.” Nonetheless, dramatically reduced debt may well be our city’s greatest positive impact on generations to come. Like a family paying off the credit card, governments that pay off mounting debt free up more money each year that can be spent on basic services.

In tough times, tough-minded leaders can make tough decisions that deliver innovative results under difficult circumstances. If we do our jobs right, some of the best results we deliver won’t be seen for years to come. We have seen tough times before. We survived them all and came out better. We can do that again.