The Peripheral Knowledge Paradox: Interfirm Knowledge Partitioning and Integration in Services Contracting

Specialized firms engaged in service offshoring contracts often face a tension between specializing in their own domain and maintaining knowledge in their partners’ domains. When knowledge is “peripheral” to a firm’s own specialty (e.g., an information technology (IT) service contractor’s knowledge of a client’s business domain or a client’s technical knowledge of a contractor’s domain), firms face a paradoxical dilemma of how much of such knowledge to invest in. This paper explores when it is important for clients and contractors to have in-house knowledge beyond their own, to be effective in IT service offshoring. We explore IT service engagements where it is more important for (a) the client to have deeper technical knowledge and (b) the contractor to have deeper business domain knowledge. We define the pattern of client–contractor knowledge overlaps as interfirm knowledge partitioning. The central thesis is that ex ante alignment between interfirm knowledge partitioning and service engagement newness enhances interfirm knowledge integration in offshoring engagements. To effectively organize service offshoring, solutions to interfirm knowledge integration problems in the presence of interfirm specialization are required; this is the underlying idea of this paper. The proposed model is tested using data on IT service offshoring engagements by 209 U.S. firms to foreign IT service firms. The findings offer novel theoretical insights into optimal interfirm knowledge partitioning in services contracting. Implications for service science theory and practice are also discussed.