Crowdsourcing was a term first coined by Wired Magazine in '06. It's a combination of the words "crowd" and "outsourcing." Outsourcing often gets a negative wrap since it is most often associated with moving jobs to third world nations, but that's a specific type of outsourcing called "overseas outsourcing" or "outsourcing overseas".
Most companies use some sort of outsourcing in their development, undoubtedly the two most common types is the use of an accounting or legal firms. Rather than hire a lawyer or an accountant full time, a smaller company may employ these professionals only when they need them.
Crowdsourcing refers a specific type of outsourcing, that instead of hiring a single person or company to do a function, hires (or rewards) many, many people to accomplish the same thing.
However the primary motivation of crowdsourcing is not solely to save costs (and sometimes it increases costs).
Social news sites such as digg crowdsource the editor, letting thousands of people vote on what makes it on the news site. The effect is not primarily that digg gets to save money on hiring an editor, but rather that they have democratized the editorial function of news. Wikipedia crowdsources knowledge letting thousands of people write and edit articles on various topics.
Innocentive is crowdsourcing for pharmaceutical and biomedical companies, letting thousands of people present solutions to research and development problems. Threadless, a t-shirt design company, uses crowdsourcing to allow anyone to become a t-shirt fashion designer.
We use crowdsourcing to generate thousands of videos about a company
these videos are distributed virally,
generate a ton of buzz, are spread by word of mouth,
and are automatically tested by a focus group of 1.2 billion people.