This paper develops a novel theory of domestic outsourcing grounded in search frictions and worker-firm heterogeneity. The theory is motivated by new empirical evidence on the outsourcing of skilled services in the United States, notably its rising employment share, outsourcing wage premium, and the discernible sorting of higher-ability workers into outsourcing. In the model, workers, output-producing firms, and labor intermediaries participate in a single frictional labor market. These intermediaries then play the role of a competitive matching market for worker abilities and firm characteristics. A quantitative formulation of the model unveils that, by mitigating the adverse effects of search frictions, the increase in outsourcing share of employment since the 1980s has resulted in output gains of 4 percent, with workers being better off by 2.5 percent.