Our focus on knowledge as an important source of value creation in IT outsourcing arrangements is based in knowledge-based theory, which argues that knowledge is a key competitive asset that can be created within and transmitted between organizations (Davenport and Prusak 1998; Grant 1996; Grant and Baden-Fuller 1995; Kogut and Zander 1992). Studies show that a firm’s knowledge allows it to improve its competitive position (King and Zeithaml 2003) and is positively associated with performance (De Carolis and Deeds 1999). The theory also points to the importance of benefits accruing from the knowledge held by other firms, positing that a firm may not be able to efficiently create and apply knowledge in its production process due to a lack of resources and expertise (Grant 1996; Langlois and Foss 1999). In such cases, a firm may seek external partners to augment its knowledge assets and increase the efficiency with which knowledge is utilized (Grant and Baden-Fuller 1995; Takeishi 2002). As a result, firms can differentiate themselves from their competitors with the help of transmitted knowledge via interfirm agreements (Zander and Kogut
1995)