From the Vendor's Perspective: A Complementarities Theory View on the Value Proposition in IT Outsourcing (Research Seminar, April 18th, 2002) Natalia Levina New York University Abstract To date, most research on IT outsourcing concludes that firms decide to outsource IT services because they believe that outside vendors possess production cost advantages. Yet it is not clear what enables vendors to provide production cost advantages. In fact, given contractual threats associated with outsourcing, large firms may attempt to replicate vendors’ production cost advantages in house. Mixed outsourcing success in the past decade calls for a closer examination of the IT outsourcing vendor's value proposition. While the client’s perspective on outsourcing and the client-vendor relationship have been examined in the IT outsourcing literature, the vendor's perspective has hardly been explored. In this paper we conduct a close examination of vendor strategy and practices in one long-term successful systems management outsourcing engagement. Our analysis indicates that the vendor’s value proposition was based on the economic benefits derived from developing a complementary set of core competencies and market strategy. We use the economic theory of complementarities to explain the IT vendors’ value proposition and how they can offer services that cannot be readily replicated internally by client firms.