We explore how increasing efficiency compromises adaptability when a firm outsources during the emergent stages of a technological innovation. Since efficiency -related problems differ in complexity and structure from those associated with adaptability, their optimal governance differs. While the former benefits from outsourcing, the latter is better off managed within organizational boundaries. In addition, a firm's ability to engage in complex problem solving buffers the efficiency-adaptability trade-off that occurs with increasing levels of outsourcing. In this study, we find support for our theses. Although outsourcing yields efficiency gains up to a certain point, it hurts adaptability. However, a firm's absorptive capacity mitigates this trade-off. Our data on outsourcing for Internet banking is both archival and based on two surveys conducted with 100 U.S. banks. Copyright © 2011 John Wiley & Sons, Ltd.