(Business 2.0) – Like a lot of people who buy software for their businesses, Rick Dalzell saw his budget frozen last year. Unlike most of those people, though, Dalzell still has about $200 million to spend--but then, as chief information officer at Amazon.com, he has a lot to do.

Most important, Dalzell has to maintain Amazon's edge in technology--an edge that is more critical than ever as Amazon increasingly squares off against sophisticated e-commerce survivors like eBay. But that's why Jeff Bezos hired Dalzell away from Wal-Mart five years ago. In Bentonville, Ark., Dalzell made a name for himself by slashing $1.4 billion out of inventory costs; he has continued in the same vein in Seattle. Just two and a half years ago, Amazon spent 11 cents on tech for every $1 in sales. Now, under Dalzell's new austerity regimen, the company spends only about 6 cents. All told, Dalzell has cut Amazon's tech spending 25 percent from its September 2000 peak, even as the company added nine new categories to its retail lineup and signed on dozens of new corporate partners. The native of northern Kentucky says, "I'm just one of those Midwestern guys who doesn't like to spend money."

Maybe, but you don't get results like Dalzell's just by squeezing pennies. Yes, you need to slash unnecessary costs. But at other times, it's better to invest your way to efficiency. As Dalzell puts it, "You can't be cheap for the wrong reasons." Here are the rules he's followed to success at Amazon.

Embrace open-source. Dalzell says the single most effective move he made was to replace Sun servers with Linux boxes from Hewlett-Packard. For every $1 spent on the new hardware, he saved $10 in license fees, maintenance, and expected hardware upgrades. Some companies, Microsoft chief among them, have long warned that Linux savings are deceptive, certain to be offset by the costs of maintaining an operating system unsupported by a corporate proprietor. Dalzell doesn't buy it. "I haven't found any of the hidden, secret costs that others would make you believe exist for Linux," he says.

Recognize when you have to spend to save. Amazon maintains its own warehouse-management software, even though ready-made alternatives like Logility might cost as little as $375,000. But with its own software, Amazon can tweak inventory algorithms whenever it wants--so that, for example, a book isn't shipped to New York from a Nevada warehouse when it could be sent faster and cheaper from Delaware.

Help your partners help you. Dalzell recently began to invest in Web services--tools that make it easy for partners to hook into applications Amazon had developed for its own use. Now retailers like Nordstrom and Gap can feed their inventory into Amazon's new apparel store without a lot of custom coding. It also means that freelance programmers can build their own online stores using Amazon's payment, fulfillment, and customer services. (These associated stores get a 5 to 15 percent cut of the orders they bring to Amazon.) For example, a Romanian coder created www. simplest-shop.com, which uses Amazon's Web services tools to extract product data from Amazon and then fashions side-by-side comparison tables--a feature not available on Amazon.com. What could be better? Customers benefit, and Simplest Shop essentially does Amazon's marketing for it.

Use a tight budget as an excuse to get creative. Austerity forces you to focus on what really works. And in a perverse way, that frees up creativity. "First you think about the problem in a million different ways," Dalzell advises. "You'll come up with something really innovative. Then you apply the real-world constraints, and figure out how to solve the problem." Dalzell looks at his stagnant budget as an engineering challenge. And as every engineer knows, it's the constraints that make a problem interesting. --OWEN THOMAS