Outsourcing has become an important business strategy because it enables businesses to reduce and control operating costs, to improve company focus, to gain access to world class capability and to free internal resources for other purposes. Outsourcing has been used as part of the new public management agenda with the aim of increasing efficiency and decreasing costs. Consequently, its effects on productivity remains a factor to be considered by managment in decision making. The purpose of this study was to establish the effect of outsourcing on employee productivity in selected parastatals. The research objectives were to establish the forms of outsourcing used in selected parastatals in Kenya, to find out the effect of outsourcing on operational cost, to determine the effect of outsourcing on employee productivity and to establish the effect of outsourcing on innovation in the selected parastatals. A descriptive research design was adopted in this study. Simple random sampling was used to select questionnairerespondents while purposive sampling was used to select interview respondents. Quantitative data resulting from the questionnaire were analysized using Statitical Package for Social Sciences (SPSS) inthe selection of respondents and presented in table and figures while qualitative data was anayzed using themes and presented in form of narratives.