The following description is from dminoz's "Daily Imperialist". (Authorship and copyright not certain, and his e-mail seems to be dead; if he or anyone else claiming authorship thinks this should not be here or should have better attribution, let us know.) :

The Spy is likely to become your favorite civilian unit, especially once you notice that he releases carrier pigeons from time to time.
The Spy is a very powerful unit; using him well will let you win wars, cut research costs, and prevent other Great Powers from stealing your scientific secrets.
While engaging in scientific espionage, remember that exposure of your Spy will affect your diplomatic relations in a negative way. On the higher difficulty levels, this may be all it takes to put you at war with someone who already doesn't like you too much.
The three factors that affect the chances of your Spy getting caught when engaging in espionage on enemy territory are as follows:
  1. The presence of an enemy garrison: the larger the garrison in the province your Spy is in, the greater the chance he'll be caught.
  2. The Presence of an enemy Spy: Obviously, strong enemy counter-intelligence increases the danger.
  3. The status of your diplomatic relations: if you're at war with someone, they'll be looking out for your Spies.
Of course, all the above applies to your chances of catching an enemy Spy, too. When you do, there's a chance the enemy Spy will change sides, and you'll gain a Spy for free.
If you're ahead of others in research, don't neglect to put a Spy in your own backyard, assigning him to counter-intelligence duty. You need just one -- your Spy works on an empire-wide basis, and assigning more than one to counter-intelligence has no effect. The computer players are masters of espionage, and you'll be capturing quite a few of their spies as the game goes on! You should have at least one Spy active at all times. If you're at war, get more. They're invaluable when planning attacks on enemy provinces.

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