Built upon configuration theory, this study performs a Qualitative Comparative Analysis (QCA) to delineate alternative and sufficient configurations of local knowledge spillover (LKS) channels, that is, how informal interactions and spinoff, and absorptive capacity are combined to facilitate service innovation. Primary data was collected from the largest software outsourcing cluster in Vietnam in 2018, which provides a sample size of 42 firms. The findings imply that multiple configurations of different channels of LKS in conjunction with absorptive capacity can lead to service innovation. This study makes three important contributions. First, it contributes to the debate over the critical role of LKS and absorptive capacity in innovation by offering a more holistic, yet nuanced understanding of the causal mechanisms underlying service innovation. Second, this study sheds light on viable and equifinal pathways for enhancing innovation capabilities, therefore contributing to the literature on cluster upgrading and global service sourcing. Third, it provides some managerial implications for indigenous spinoff firms in developing countries seeking to innovate through the strategic use of LKS.