Assuming you are not in the translation business, just need such services, either as an individual or for your organization, here are some candid tips to help you in avoiding unpleasant outcomes.
Of course they are not rules that apply always, nor they cover all possibilities. Common sense is advised to prevail, always!
You probably don't need a translation agency if:
Your translation is between two fairly common languages worldwide, and you are in a country where either one is the national language. It should be relatively easy to find and contact such a translator directly.
The content of your translation is not specifically directed to practitioners of a profession; any individual with average education will read and understand it.
Only a few copies of your translation will be issued, few people will read it, so the cost of perfectionism in proofreading is not fully justified. 99% right is good enough.
You need a sworn translation in any country that has specific laws about it (e.g. Brazil, Spain, Argentina), and therefore it should be possible to find a list of duly accredited professionals that you can contact directly.
Your translation involves something that requires direct contact with the translator, e.g. guidance on terminology for some new technology where reference material is not widely available.
It's the translation of a foreign book to be commercially published. It's your job to find a suitable translator!
All you need is the translated text, you have all necessary formatting, DTP, web design, whatever post-translation processes covered.
There is no extraordinary rush in terms of too much volume and too little time. One competent translator can handle normally 2,000 to 4,000 words per day, sometimes more.
No special software is involved, e.g. PowerPoint, CAD, video subtitling, DTP-specific programs... though you may find translators that work with the one you need.
You have means to ascertain the final quality of the job, i.e, someone dependable to have a look at it, if you don't master the target language.
You probably need a translation agency if:
Your translation requires relatively hard-to-find language pairs, and/or technical specialization in fields of human knowledge where translators are rare.
You need simultaneous translation into several different languages, or have a constant stream of translation work, and don't have time to deal directly with a number of translators.
Your translation will be printed in several thousand copies, or (hopefully) seen by millions of web surfers, and your organization's image will be at stake, so failproof checking is a must.
You need a certified translation for a country where there are no specific laws on that matter, hence there isn't a list of accredited professionals, and it's better to have an established organization to vouch for its accuracy.
You have reference material for the translation content, however you haven't manpower available to answer queries from translators all the time.
You need additional services, either bureaucratic (e.g. notarization, consular legalization) or technical (e.g. video subtitling or dubbing, graphic arts editing, DTP, etc.) and want a turn-key service.
You have a large volume to translate and time is short. You know that more than one translator will be needed, but you don't want the burden of assembling and adjusting all the pieces into something uniform.
You need the translation of material available in proprietary files created with some specific application, e.g. CAD, InDesign, QuarkXpress, PowerPoint, Flash, etc.).
The job is complex, and/or it involves several people/organizations, however you want to process only ONE invoice for it all, with all the work having been thoroughly checked in advance.
As translation is far away from your core business, you just want to send the job with instructions to someone who can do it, and wish that the next news you'll have from them will be the finished job and the invoice; nothing in the meantime.
Tips for hiring a freelance translator:
Do not trust blindly the assertions on their CVs or web sites. An impressive list of clients served may be meaningless. Imagine if all the "work" they did for, say, Microsoft or Disney, was to translate a "No smoking" sign! If available, ask how long they have been working for certain clients, or how many jobs they have done for them.
Don't force translators outside their comfort zone, either in languages or specialties. Just because Spanish and Portuguese are close, a good Brazilian translator working from English might not make an acceptable job from Spanish. A financial translation specialist might not be able to deal well with IT material, and so on.
If you are looking for rock-bottom prices and couldn't care less about quality, consider using free online automatic translation, like http://translate.google.com. Though the flaws will be different, they will be consistent throughout the text, and the overall quality of a cheap amateur translator will be about the same.
Don't look too far away. If you need translation between two European or Pan-American languages, what do you think your chances are in finding a suitable translator in the Far East?
Do care about language variants. If you want a translation for a certain country, be specific! Don't rely on the existence of a 'neutral' variant; there often isn't one.
Don't take loans from translators, they are not in the money-lending business. Strive to pay them as soon as the deliverables have been accepted. If you need cash, borrow it from a bank.
Don't fall for the 'native speaker' talk. If a translator is truly competent, they'll have mastered the target language, regardless of where they have been born. However if your material needs catchy wording, use someone actually living in the target language area (either as a translator or for final editing). A native speaker living for decades outside their homeland may be using outdated language, if some slang or wordplay is involved.
Ascertain whether they'll be doing it themselves or outsourcing. If they will outsource parts of the translation job, make them accountable for consistency; it's their problem. If they will be outsourcing post-translation work (e.g. DTP, dubbing), make them fully responsible for its outcomes - you don't want to have to deal with their vendors. If they'll be outsourcing the whole thing, treat them like an agency (see below), not a freelancer.
Don't ask for miracles. If they tell you it can't be done in the time you are giving them, believe it! Don't insist in forcing them to believe that your farfetched deadline is possible. Better safe than sorry.
Don't believe in translators who tell you they can do anything. Chances are that their work standards are so low for everything, that anyone would be able to improvise with such (despicable) quality.
Tips for hiring a translation agency on the Internet:
Don't get impressed by their web site. Any fly-by-nite business could get a great web designer to make it look like heaven. Likewise, a great translation agency may care more about their web site content than bother to dazzle you with flashy animations all over.
Don't get overly impressed by their clients list. A one-page memo translated ten years ago may be the only thing that led any prestigious organization to be listed there.
If they offer unbeatable low rates, scram! Look for honest market rates. They might be using free online automatic translation, which you could do as well... at absolutely no cost! Otherwise they might be using such cheap amateurs that it will be a waste of time.
If their web site is multilingual, check all pages in languages you know. This should give you a good sample of the kind of translators and proofreaders they use.
Check their translators recruitment page. If they seem overly interested in rates, it's likely that they are hiring the cheapest vendors in the marketplace.
If it is available on their web site, check their payment terms to translators. There are many translation agencies that will collect from you COD or even in advance, and yet pay their translators in 30, 60, or more days... with money from the next job they get. These agencies usually don't know (nor care) much about translation; it's just a scheme to get some interim cash at hand.
Also check if they demand that translators deliver fully-proofread material, while asserting that all their work is reviewed by someone else. If they do, you may be paying extra for services you won't get.
Don't look too far away for an agency. Try to hire one in your country, or in the target-language country. Though the cost of living in some places may be lower, most likely they'll have to find competent translators for these languages in either of the two first ones.
Some home-based one-person translation agencies may, in fact, be really good, as long as they don't overgrow their managerial capacity. Unless they pretend to be larger than they actually are, there is no harm.
Last but not least, if it's too good to be true, it probably is. Watch out!