How do service suppliers that arise from outsourcing of business functions develop their organizational capabilities? Drawing on the cases of EDS and IBM in the IT outsourcing sector, the article highlights the process by which knowledge is transferred across the client-supplier interface. These services outsourcing firms have developed a novel form of skill acquisition-staff transfer from client organizations-which facilitates their rapid expansion and provides an effective means to acquire client-specific knowledge and develop competences. The challenge for these firms is to develop distinctive capabilities through combining client- (and industry-) specific knowledge brought by staff transferred from multiple client organizations and company-wide processes. These processes capture and diffuse a common system of routines in the services supplier across all different projects and countries of operation. The strategic response of these services outsourcing firms is a phased learning model designed to bring greater productivity and efficiency in the provision of an increasing number of projects. © The Author 2011. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.