This paper proposes a model that suggests how firms could create strategic capabilities through IT outsourcing. We suggest how a firm adds value and reaps strategic benefits from IT outsourcing arrangements. A primary proposition is that, in the process of penetration of the managerial and technical capabilities of external vendors, managerial and social factors act as facilitators or inhibitors of the process. When the client firm is able to integrate the IT capabilities of outsourcing vendors, these assimilated capabilities in turn become the strategic source of IT competence.