Exploring complexity and contradiction in information technology outsourcing: A set-theoretical approach

•IT outsourcing faces the tension between exploration-exploitation activities.•Cost reduction practices such as having detailed contracts impede strategic innovation.•“Best-of-breed” configuration emerges as an approach to overcome outsourcing tensions.•Combining transaction-based and portfolio-based governance is suggested for IT outsourcing.•Set-theoretical approach appears to be useful to explore outsourcing tensions. Effectively managing Information Technology outsourcing (ITO) requires integration of conceptually distinct and sometimes contradicting factors. For instance, ITO “best practices” for cost reduction can inhibit a firm’s innovativeness. To address these challenges, we build on governance and capability perspectives and employ a set-theoretic approach to examine ITO practices in 27 firms. Our exploratory study reveals four distinct ITO configurations, of which three lead to positive outcomes and one leads to negated-outcomes. Detailed contracts appear to be a necessary condition for cost reduction but can also be an impediment to strategic innovation; and firms can consider a “best-of-breed” strategy to overcome this tension. Our findings call for more attention to both transaction-based and portfolio-based governance to enable flexibility for innovation while retaining rigor and risk mitigation for cost reduction.