The nonprofit sector is poised to take on unprecedented importance in the United States. Annual charitable giving by individuals, corporations, and foundations amounted to $190 billion in 1999,¹ but that total could double as an additional $6 trillion, and perhaps much more, flows into the sector over the next 50 years.² At the same time, the federal government is significantly reducing its role in providing many social goods, leaving the task largely to the nonprofit sector (see sidebar, "The nonprofit landscape").

But most charitable organizations are simply not ready to meet this challenge. With a limited organizational infrastructure and with management teams consumed by a never-ending search for funding, few nonprofits³ have time to hone their strategy or to improve their effectiveness. Nor do they have the incentive or the ability to grow. The result is a sector dominated by tiny institutions—more than 40 percent have annual budgets of less than $100,000—that work in isolation and duplicate efforts (Exhibit 1). The sector is filled with many talented and dedicated people, but it is far less effective than it could be in achieving its vital social mission.

This unfortunate state of affairs results largely...