After spending more than $1.2 trillion on information technology products and services during the late 1990s, companies are slashing their IT budgets. In today’s harsh climate, pressure to meet current earnings inspires much of this cost cutting, but many executives, believing that their organizations gained little or no value from some of the systems installed during the great technology binge, are reluctant to send good money after bad.

Overinvesting in IT does conceal a deeper problem: many companies are undermanaging technology by using outdated frameworks, processes, and controls—legacies from the time when the IT organization was just a support function—to decide which systems to invest in and how to install them. Today, technology lies at the strategic heart of the business, so there are more choices to sort through, more complex issues to consider, and more risks to fear.

Prudence in spending should be just the start of reform. Companies must understand where technology can deliver real value, not just marginal benefits. A few companies, such as Charles Schwab, Dell Computer, and Wal-Mart, did gain tremendous value from their investments during the bubble years by focusing on the specific productivity drivers of their sectors, suggest James M. Manyika and...