Why Use Config Files?
You have created 10 packages in BIDS on your Development laptop and now you need to deploy them to your development server. From there they will be deployed to QA and then on to Production. Your connection managers currently point to the localhost on your machine. You could deploy them to the first server then go into each package and point all the connection managers to the data source and destinations on that new server. Depending on the number of packages and connections this could take some time. You would then have to repeat it each time you move these packages to a new server. You may ask is there a better way?
This is where configuration files can make your life easier. Configuration files allow you to set properties for a package that will be saved outside of BIDS. You are able to save values for all the properties of the package such as connection managers, variables, task properties, just about any property. When the package is run the system will check for the configuration files and will replace the values listed in the package with those in the configuration file then run. If it cannot find the configuration file it responds differently depending on the version of SQL Server. In SQL Server 2005 the package will fail due to error if it cannot find the configuration files. In SQL Server 2008 the system will try using the default settings in the package. If they work the package will not fail.
If you set up a configuration file for each of your connections you can change the server in each of your configuration files when you move packages. You will want to move the configuration files along with the packages. If multiple packages use the same connection they can use the same configuration file which would cut down on the number of configuration files you need and number of places you would need to make a change.