We address independent and joint effects of contractual hazards and technological capabilities on governance, arguing that strong technological capabilities improve a firm's ability to govern transactions, making outsourcing feasible despite certain contractual hazards. Examining a random sample of 405 service contracts from a single information technology firm, we found that contractual hazards encouraged internalizing transactions. Weak technological capabilities increased the likelihood of subcontracting, but strong technological capabilities had no independent effect. The latter had impact only in the presence of certain contractual hazards. These results illuminate why firms facing similar levels of contracting hazards organize their transactions differently. 1 We acknowledge that capabilities come in many forms and variations-technological, managerial, operational, marketing-based, etc. We focus on technological capabilities, defined as superior ability to create a good or service that meets a customer's requirements for functionality, quality, and cost and schedule (see Hoetker, 2005: 78). We focus thus for several reasons. First, technological capabilities have been shown to have a strong influence on governance (e.g., Hoetker, 2005; Leiblein & Miller, 2003). Second, technological capabilities are central to resource-based theories of firm-specific advantage (see Kogut & Zander, 1992; Mahoney & Pandian, 1992; Martin & Salomon, 2003b). Finally, technological capabilities have been shown to be particularly important in high-technology industries such as information technology, which is examined here (e.g., Mayer, 2006; Mayer & Argyres, 2004; Martin & Salomon, 2003b).