Outsourcing is defined as the management and/or day-to-day execution of an entire business function by a third party service provider.

Outsourcing and out-tasking involve transferring a significant amount of management control to the supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust.

The concept started with Ross Perot when he founded Electronic Data Systems in 1962. EDS would tell a prospective client, "You are familiar with designing, manufacturing and selling furniture, but we're familiar with managing information technology. We can sell you the information technology you need, and you pay us monthly for the service with a minimum commitment of two to ten years." Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Outsourcing business is characterized by expertise not inherent to the core of the client organization.

A related term is out-tasking turning over a narrowly defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business.

In the corporate environment, the term “outsourcing” often refers to a particular type of outsourcing, business process outsourcing (BPO). BPO occurs when an organization turns over the management of a particular business process (such as accounting or payroll) to a third party that specializes in that process. The underlying theory is that the BPO firm can complete the process more efficiently, leaving the original firm free to concentrate on its core competency.