In recent years, information technology (IT) and innovation were considered important for enhancing the performance and competitiveness. However, the relationship between IT, innovation and firm performance has not been thoroughly discussed in the past ten years. Besides, small and medium-sized enterprises (SMEs) occupy the great proportion of the total number of enterprises in the world, and most of them are service firms. However, development of service industry is restricted due to the insufficient input of innovation. In order to understand the present innovative situation of business services and to analyze the relationship between the IT, innovation and firm performance in the service industry, a conceptual model is developed in this study. Data for the empirical investigation originates from the SMEs of business service firms. The empirical results show that innovation is mediating the effect of IT on firm performance.