Our study builds on earlier research and makes several new contributions. To the best of our knowledge, this is one of a very few studies that has assessed the overall economic gains from IT outsourcing and the contribution of IT knowledge transmitted from IT services firms. In contrast with earlier research (e.g., Han et al. 2011; Knittel and Stango 2007), our firm-level study examines the mechanisms by which productivity gains are achieved, encompasses a variety of industries, and allows for heterogeneity in the value received by client firms. By accounting for firm-level differences, we are able to develop a deeper understanding of the sources of the payoffs, which, in turn, allows us to develop helpful insights for managers evaluating the outsourcing decision. Overall, our results shed light on the heterogeneous nature of the overall economic gains that accrue from IT outsourcing and highlight the critical role of the IT knowledge held by IT service providers.