think it is along the same lines as adding a larger exhaust housing - i.e. lets more exhaust gas out of the engine...
....which also prevents overspeeding of the turbo (where the turbo is then operating outside it's optimum efficiency) - you won't lose the efficiency of the turbo as such, if the turbo (and any cut back) is spec'd correctly for the application. I think Matt was also correct in saying it reduces back pressure (which would increase if the housing was 'too small' - the cut back is correcting this to a degree)