Most information systems (IS) research has examined the impact of information technology (IT) on the organization of economic activities by starting from the theoretical speculation that IT reduces coordination costs and improves coordination of economic activities. This theoretical speculation, however, has not been empirically analyzed in the IS field. The value of IT for reducing coordination costs has also not been considered in the studies on IT productivity gains. This study empirically examines the relationship between IT and coordination costs, and the relationship between IT and firm productivity by considering coordination as a factor of production. The results indicate that IT is strongly associated with a decline in coordination costs and that IT and coordination make a substantial and statistically significant contribution to firm output. The results show that IT contributes to firm output by reducing coordination costs and improving coordination; that is, by making a higher level of coordination more efficient.