The tide began to turn in WCW's favor on Memorial Day 1996 when Scott Hall, who had wrestled in the WWF as Razor Ramon, interrupted a match by walking down through the crowd into the ring. He delivered his "You want a war?" speech: "You people know who I am," he began, "but you don't know why I'm here." Hall said that he and two of his associates were going to "take over." Many thought he meant Bret Hart and Shawn Michaels, then still with WWF. Hall challenged the best WCW wrestlers to stand up and defend the company against their onslaught.

The next week, Hall reappeared on Nitro and pestered the WCW announcers. Sting confronted him, and was rewarded with a toothpick in the face for his efforts. Sting retaliated by slapping Hall across the face, and in response Hall promised Sting a "little... no... BIG surprise" the next week in Wheeling, West Virginia. This surprise ended up being Hall's good friend and former WWF Champion Kevin Nash. Nash delivered his own speech to Bischoff, referring to WCW's slogan of "Where The Big Boys Play" with the response "We didn't come here to play," and warning Bischoff, "The measuring stick just changed here...you're looking at it.", and in the weeks following Hall and Nash were collectively referred to as "The Outsiders." Both men took to showing up unexpectedly during Nitro broadcasts, usually jumping wrestlers backstage, distracting wrestlers by standing in the entranceways of arenas, or walking around in the audience. Within a couple of weeks, they announced the forthcoming appearance of a mysterious third member.

At Bash at the Beach 1996, Hall and Nash were scheduled to team with their mystery partner against Lex Luger, Randy Savage and Sting. At the onset of the match, Hall and Nash came out without a third man, telling "Mean Gene" Okerlund that he was "in the building," but that they did not need him yet. Shortly into the match, a Stinger Splash resulted in Luger being crushed behind Kevin Nash, and being taken away on a stretcher, reducing the match to The Outsiders vs. Sting and Savage. Hall and Nash took control of the match when Hulk Hogan came to the ring. After standing off with The Outsiders for a moment, he suddenly leg dropped Savage, showing himself to be the Outsiders' mysterious third man. Giving an interview with Okerlund directly after the match, Hogan claimed the reason for the turn was that he was tired of fans that had turned on him. Hogan referred to a "new world organization of wrestling". The faction was soon dubbed the New World Order (nWo), beginning a feud between wrestlers loyal to WCW and the nWo. The fans in attendance were so outraged at Hogan's betrayal that they pelted the ring with debris, such as paper cups and plastic bottles, for the duration of his interview. One fan even jumped the security railing and tried to attack Hogan in the ring, but was swiftly subdued by Hall, Nash, and arena security.

According to Bischoff, the original plan for the nWo was to have Sting be revealed as the third man rather than Hogan, but Hogan convinced Bischoff to make him the third man instead, with the reasoning that the third man needed to have WWF name value much like Hall and Nash did during their initial appearances as the Outsiders. Because of his tremendous success as the face of the WWF in the 80's and early 90's, Hogan was universally associated with the WWF and therefore was the perfect choice to lead the nWo. Hogan's heel turn at Bash at the Beach marked the first time in over 15 years (dating back to his face turn in the AWA in 1981) that he portrayed a villainous character, and also served to revitalize his in-ring persona after his "Hulkamania" gimmick started to grow stale with WCW's audience.

Shortly after, the WWF filed a lawsuit, alleging that the nWo storyline implied that Hall and Nash were invaders sent by Vince McMahon to destroy WCW, despite the fact that Bischoff asked Nash point blank on camera at The Great American Bash, "Are you employed by the WWF?" to which Nash emphatically replied "No". Another reason for the lawsuit was the WWF claimed Scott Hall acted in a manner too similar to the character Razor Ramon which was owned by the WWF. The lawsuit dragged out for several years before being settled out of court. One of the settlement's terms was the right for the WWF to bid on WCW's properties, should they ever be up for liquidation; a settlement that would prove invaluable in the future.

Though an on-screen threat to the WCW promotion, the nWo would prove helpful in the early stages of the ratings war. On the September 23, 1996, episode of Nitro, with most of the WCW roster over in Japan, the group took over the entire show, including the broadcast booth and the ring announcer's role, and branded the episode as their own. The Giant was the ring announcer and Hollywood Hogan, Syxx, Kevin Nash, Scott Hall, Vincent, Ted DiBiase, and Eric Bischoff (who was not part of the faction at the time) were at the broadcast table.