Background – Leveraging external sources of innovation (ESI) is found to be vital for small and medium-sized enterprises (SMEs) innovation work as they commonly suffer from a lack of resources to facilitate and execute this work. The interaction with the external environment does, in turn, enable access to knowledge and capabilities that SMEs currently not possess. Moreover, as collaborative software tools (CSTs) have proven to play a critical role in today’s innovation processes and have transformed the way of interacting with the external environment, it becomes obvious that research in this field must account for the usage of these tools. CSTs have a significant impact on communication, cooperation, and coordination and are, therefore, widely used to facilitate collaborations in intra-organizational groups. Thus, these tools can be beneficial for SMEs as it provides them with greater access and availability to the external environment. Purpose – This research aims to understand how SMEs can leverage external sources of innovation with the application of collaborative software tools and develop fruitful insights that can be used to facilitate innovation work for SMEs that typically lack internal resources.  Method – This study approaches the underlying philosophy of a relativist ontology, a social constructionist epistemology, and iterative grounded theory. For the methodology, empirical data was collected through 31 semi-structured interviews with participants from SMEs and their ESI in the region of Jönköping County following a purposive sampling method. The empirical data was further analyzed by conducting a grounded theory strategy for process analysis. Findings – We develop two processes illustrating how SMEs can leverage ESI with the application of CSTs. It was found that the application of CSTs in these processes enables SMEs to explore, acquire, and utilize information and knowledge from ESI in ways that previously have not been possible. By providing new ways of communicating and cooperating, CSTs facilitate the activity of sourcing knowledge and resources from ESI. Consequently, the SMEs are provided with new knowledge and resources that, in turn, improve and enhance the development of innovations. Thereby we contribute to an understanding of how SMEs can leverage ESI in the 21st century.