Philanthropic foundations are knowledge-intensive bodies. Almost everything they do, from identifying innovative nonprofit organizations to evaluating grants and publishing policy-shaping reports, depends on the use of human and intellectual capital. But many philanthropies, fearing that a dollar spent internally is a dollar wasted, have neither the organization nor the systems to manage their knowledge properly. What they fail to understand is that knowledge is a cornerstone of effective philanthropy.

The organizational changes that many foundations are undergoing to improve their performance highlight the need for better knowledge management. Some of them are responding to pressure from donors and the media to demonstrate their impact more clearly. But many must now cope with tighter finances, for over the past few years, falling stock markets have cut the value of many US endowments by an average of 20 to 30 percent, inevitably leading to shrinking grant portfolios or increasing staff cutbacks. In short, foundations are searching for ways to do more with less.

If they follow the right approach, they can tap into their knowledge to improve the long-term effectiveness of their grants, to lower the cost of administration, and to invest in more effective strategies for social change. Just as...