This paper seeks to address this gap. We examine whether IT outsourcing leads to a productivity payoff for client firms, focusing on the role of vendors’ IT-related knowledge as a source of economic value, and consider the conditions that influence the magnitude of the payoff. While there may be multiple pathways to improvements in firm-level productivity improvement from outsourcing, we focus on IT-related knowledge since economies of specialization, which are an important source of advantage for vendor firms, arise from accumulated knowledge. Specifically, IT-related knowledge allows an external provider to achieve higher levels of efficiency in the delivery of IT services than their clients, while also enabling them to improve their business performance through the implementation of better systems. In addition, learning effects have been shown in other settings to be a critical element of productivity gains (Caselli and Coleman 2001; Coe and Helpman 1995). Hence, we argue that vendors’ IT-related knowledge is likely to be a key source of productivity improvement for client firms.