Information technology (IT) has profoundly changed the way that business is conducted. With the use of IT, organizations radically redesign their business processes. IT is also radically restructuring the market by altering customer-supplier relationships. These changes are encouraged by the ability of IT that facilitates better information processing, sharing, and faster responsiveness, thereby improving coordination of the economic activities of separate units of an organization and across organizations. Most information systems (IS) research (Malone, Yates, and Benjamin 1987, 1989; Gurbaxani and Whang 1991; Clemons and Reddi 1992; Bakos and Brynjolfsson 1993; Brynjolfsson, Malone, Gurbaxani, and Kambil 1994) has examined the impact of IT on the organization of economic activities based on the theoretical speculation that IT reduces coordination costs both within an organization and between organizations, and improves coordination of the economic activities critical to the best use of resources and the delivery of goods and services. This theoretical speculation, however, has not been empirically analyzed in the IS field. This paper provides an empirical analysis of the relationship between IT and coordination costs, and presents some implications for how IT contributes to firm output.