Companies are swinging the ax at their spending on information technology: they reduced expenditures on new hardware and software by 15 to 25 percent, on average, in 2002—a drastic turnaround from the 5 to 10 percent annual increases in new IT spending that were common during the past decade. Numbers of companies in North America and, to a lesser extent, in Europe are also reducing their total IT budgets, primarily by halting incomplete projects and laying off employees. Many of the cuts have been made to improve earnings, though they also reflect management's disappointment with the results of huge spending on technology during the high-tech bubble years of the late 1990s.

A few companies have decided that IT cost cutting provides a great opportunity to untangle their systems and projects. Rather than taking the short-term view—"can we live without this piece of IT now?"—these companies are looking to the longer run, transforming their business activities and IT processes in ways that will strengthen their systems and, at the same time, eliminate the deeper causes of bloated IT spending. In a sense, the companies are finishing a job they didn't have time to complete during the bubble years.

In the...