Decals (or transfers, or whatever you want to call them) can, when done properly, bring a lot to a miniature. But for whatever reason, following the instructions that come with them is guaranteed to result in a really crap result that looks awful.

By process of trial and error (mostly error) I have worked out what I think is the best way to add decals to your miniatures. For anyone who's built a model kit or wargaming miniature and been really pleased with the paint job, only to have it ruined by crappily finished decals, here's my guide to doing them right, enhanced by my laughably amateurish diagrams.

Step 1: prepare the surface

Decals consist of an image printed onto a thin film. The film is brittle and plastic, in the technical sense that it remembers its shape (a flat sheet) and will try to return to it if possible. That means that unless you're applying the decal to a perfectly flat surface like a mirror, you're going to end up with gaps underneath the decal, which will result in bubbles that will ruin the finish.

The best way I've found to solve this is to give the surface a coat of gloss varnish before I apply the miniature. I have a pot of Games Workshop 'Ard Coat which I only rever use for this purpose: by brushing on a generous amount of varnish to the surface, you will get a nice smooth surface upon which you can apply the decal: all the troughs and peaks will be smoothed out and you won't have air gaps underneath.

Edit @ October 2016: nowadays I spray the entire model with a clear lacquer from Halfords (recommended to me by Phil Stutcinskas, a member of the Forge World studio), instead of painting varnish onto the surface where the decal is going to be applied. This protects the model, eliminates brush marks, and ensures an even finish.
Gloss varnish
Step 2: apply the decal

Now apply the decal as normal. I normally use warm water as it speeds things up, you won't have to wait very long for the paper backing to come away. Use a lintless cloth or piece of tissue paper to blot away the excess water.

Edit @ October 2016: use as little water as possible. I use a plastic box lid with just a few drops of water. The decal Step 3: soften the decal

Your local hobby shop will probably sell a decal softener such as Revell's Decal Soft. That's what I use and it works fine for me.

Decal softener works by softening the the plastic film so that it follows the contours of the surface it's stuck to. You'll want to use it even if your decal has been applied to a flat surface, as it will help the decal to adhere to any uneven spots, and will help prevent air gaps.

Once the decal is in position and you've removed the excess water, apply the softener with a brush and leave it for a couple of minutes, before soaking up the excess.

Edit @ October 2016: be very careful when soaking up the excess softener as any agitation can cause the decal to warp or break! Step 4: weathering

If you like to weather your decals, now's the time. Google has plenty of advice on doing this if you've not done decal weathering before.

Step 5: apply more gloss varnish

Once the decal is thoroughly dried, you should apply another coat of gloss. Doing so provides two benefits: firstly, it protects the decal from damage, but it also ensures that the decal has the same finish as the part of the miniature it's stuck too: you won't see the plastic film between the printed design and the paint underneath, so your decals will look seamless.

Edit @ October 2016: as above, use a spray lacquer.
Another gloss coat
Step 6: apply a matt finish

I swear by Testor's Dull-cote, but Army Painter's matt spray looks good and there are probably plenty of others. Avoid Games Workshop's Purity Seal if at all possible, unless you like your minis frosted.

Matt finish