Drawing on empirical evidence in Germany and the UK, this article examines the institutional effects on a fast-growing area of knowledge-intensive business services — IT outsourcing. This is an important area for research since the IT outsourcing market provides many organizations with an important specialized production input and is characterized by complex inter-organizational relations. By exploring institutional influences in the context of IT outsourcing, the research extends earlier studies on how client–supplier relations shape markets for business services. It also contributes to varieties of capitalism debates by highlighting heterogeneous institutional effects within countries and common systemic trends (involving powerful multinational IT firms) in the development of the market for IT outsourcing. Comparative analysis of 13 IT outsourcing contracts in Germany and the UK, focusing on the organizational practices of client organizations and IT firms, illuminated institutional effects within the organizational setting. Analysis of industrylevel data shows that the diverse institutional contexts of Germany and the UK provided an equally favourable basis for growth in the IT outsourcing market, despite its apparent deregulatory bias. But significant institutional effects were observed, specifically related to: the role of deliberative institutions (especially works councils); and institutions governing technical standards and contracting rules. Strong deliberative institutions in Germany facilitated market growth since transactions involved distributive dilemmas, particularly related to staff transfer. Also, while institutions shaped technical and contractual expertise of client managers, they were not deterministic. Instead, they interacted with characteristics of the IT outsourcing market, namely: heterogeneous client practices to improve absorptive capacity; public vs. private contracting experience; and power relations between client and IT firm in their use of market discipline.
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