Outsourcing is when any operation, job, item task or service that could be undertaken by employees within a company is contracted out to a third party. These third party functions could be performed on site or off-site (or even, indeed in another country). Temporary hiring of staff is not counted as outsourcing.
Companies typically will outsource whole functions for which specialist staff are required such as IT systems, Payroll and Human Resources, Health and Safety and Employment Law (the latter are often contracted together). Companies also outsource functions usually undertaken by mainly part time or unskilled staff such as catering or cleaning, which, as there tend to be a considerable turnover of staff in these areas, can cause distraction for the core business to manage.
People working as contractors or freelancers, may set themselves up as limited companies as a framework to manage their organisation, though this does involve managing paperwork and overseeing administration relative to their contracts, often choose to outsource the management of this to umbrella companies. Umbrella companies act as an employer to the person on fixed term contract and deal with all HMRC PAYE documentation and then pay the contractor through their own company payroll. This means the contractor just needs to submit time sheets and expense claims. Using an umbrella company is best used by contractors that have a number of both short and long term contracts and have not the time for organising all the paperwork.