This paper provides a conceptual argument for examining the challenge of IT outsourcing in the public sector through the lens of knowledge management. While IS researchers have recently begun to focus attention on the particular challenges of outsourcing in the public sector, we believe that the shift to more market based solutions is occurring without much consideration for the knowledge resources that exist in the public sector's IT organizations. Hence, we believe that knowledge management, an emerging area that has generated significant enthusiasm in the management literature, has particular relevance for understanding this challenge. In this paper, we identify differences between public and private sector IT outsourcing, then define and employ key knowledge management constructs to identify potential difficulties that public sector organizations may experience in leveraging their knowledge assets when relying on third party IT service providers.