Based on transaction-cost and resource-based theories (and other approaches), there is an extensive literature on the range of factors that are seen as relevant to the outsourcing decision. However, our investigations reveal a gap in this literature because the impact of outsourcing on firm liquidity has not been fully analysed. We address this issue through an empirical study that has identified a source of information on the amount of contractual purchase obligations arising from the outsourcing decision and demonstrate their significant impact on company liquidity and related financial metrics.

Outsourcing is a fundamental economic decision. Its reported benefits include a focus on core competences, cost reduction and quality improvement through access to supply chain expertise. Assessment of organisational strategy should include consideration of the impact that outsourcing will have on future cash flows. At present, outsourcing contractual obligations are off-balance sheet because recognition is not required under the International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (GAAP). This means that the liquidity implications arising from outsourcing arrangements cannot be assessed from analysis of a firm’s income statement and balance sheet. This is similar to a situation whereby bond rating agencies and other analysts make adjustments to account for the off-balance sheet implications of operating leases. We address this issue in relation to off-balance sheet outsourcing arrangements by incorporating Securities Exchange Commission (SEC) and Sarbanes Oxley (SOX) mandated contractual obligation disclosures into metrics that measure the subsequent changes in liquidity risk for organisations. Our data source is the SEC Edgar database that includes each company’s annual return and the SOX mandated disclosures (https://www.sec.gov/edgar/searchedgar/companysearch.html).

Our investigations reveal that the disclosures in the form of purchase obligations (POs) can be used as a proxy for outsourcing activities and provide details of resulting future cash flows. We used the Wilcoxon signed-rank test to test for significant differences at the 5% confidence level between the results of four liquidity and working capital metrics before and after the inclusion of short-term POs. A null hypothesis of no difference between ratio mean ranks before and after the addition of POs < 1 year was assumed. The analysis and testing revealed statistically significant differences between liquidity and related working capital metrics calculated using standard financial statement data and those that were adjusted for the SOX mandated PO disclosures.