Expenses

Summary

In fiscal 2007, the School's total operating expenses increased by $30 million, or 8.7 percent, to $375 million, from $345 million in fiscal 2006.

In committing to the expansion of the School's global activities, HBS has accepted the challenge of managing a larger enterprise while continuing to generate positive cash flow. The School's cash from operations is largely reinvested in the campus, providing critical funding for facilities maintenance, infrastructure, and IT upgrades, as well as debt service for building renewal projects.

The relatively high rate of inflation in the higher education sector heightens the budgetary challenge. While spending and investing strategically to further the mission of the School, HBS has placed equal emphasis on countering the impacts of inflation by tightly controlling operating costs. These efforts have produced excellent results. Although the School's operational footprint has grown substantially since fiscal 2002, total expenses have grown at a compound annual rate of 6.1 percent.

HBSP and Executive Education consume a significant portion of the operating budget, as does faculty research. Expenses in these areas cut across numerous line items in the School's “Statement of Activity and Cash Flows.” Expenses include direct costs for staff compensation, specialized outside professional services in areas such as Information Technology (IT) and marketing, and residence expenses for executive program participants. These expenses have risen in line with growth in the HBSP and Executive Education product portfolios, and in the physical scope of their operations. In recent years, this broadened base of activity has delivered substantial increases in revenue contributions to the School. By successfully controlling their fixed costs, both HBSP and Executive Education have delivered margins on the incremental revenue. These margins have been reinvested to fund the School's research activities.

Faculty research expense includes a significant portion of faculty compensation, as well as direct costs for research support staff, travel, and IT services. Also included in the cost of faculty research are allocated expenses for Baker Library resources, as well as campus facilities, technology, and administration. When viewed in this way, the School's annual investment in faculty research has increased at a compound annual rate of 5.6 percent for the past five years, rising from $70 million in fiscal 2002 to $92 million in fiscal 2007.

Salaries and Benefits

Compensation for faculty and staff is the School's largest expense. Amid increasing global competition for outstanding faculty, HBS recruits aggressively and seeks creative ways to generate appropriate long-term growth in the size of the faculty, as measured in full-time equivalents (FTEs). The ability to offer highly attractive salary and benefits packages is crucial to successful competition in the marketplace for academic talent.

While growing the faculty remains a priority at the School, the total number of faculty FTEs can increase or decrease in any given year as a result of retirements, departures, and normal fluctuations in recruiting activity. The School's fiscal 2007 faculty compensation expense remained essentially level with the prior year, reflecting a decline in FTEs to 206 from 215 in fiscal 2006.

Administrative staff levels remained carefully controlled in fiscal 2007, growing by 32 FTEs to a total of 1,109, from 1,077 FTEs at the end of fiscal 2006. Although the operational scope of the School has expanded over the past five years, HBS concluded fiscal 2007 with essentially the same total number of administrative positions as in fiscal 2002. The staff organization, however, has changed considerably since then, reflecting a continual process of new hiring and redeployment focused on strengthening the administrative functions critical to the School's teaching and research mission.

Including both faculty and administrative staff, employee salaries and benefits expense has grown at a compound annual rate of 6.6 percent for the past five years. In fiscal 2007, these costs rose by $12 million, or 7.2 percent, from the prior year, to $179 million, and represented 48 percent of total operating expenses. The major cost drivers were compensation and FTE increases in HBSP, faculty salary growth and retirement payments, and program costs in Executive Education. Salaries and benefits for faculty and their research associates represented more than 40 percent of the School's employee compensation costs in fiscal 2007,or approximately 19 percent of total expenses.

Fellowships

HBS characterizes student fellowship spending as an expense. One of the School's strategic objectives is to increase support for MBA students in need of financial aid at a rate that exceeds the rise in tuition and fees. The prospect of entering the workforce with high levels of debt can deter strong candidates from applying to HBS and restrict their career choices upon graduation. This is particularly true for students with fewer years in the workplace, those from outside the United States, and those whose early career paths have not enabled them to reduce their undergraduate loans.

The generosity of the School's alumni and friends has resulted in strong growth in endowed fellowship funds. This has enabled HBS to increase fellowship awards for incoming MBA classes at a compound annual rate of 14.4 percent for the past five years. Total fellowship expense, including those for Doctoral candidates and MBA students, compounded annually, has risen 12.9 percent since fiscal 2002.

Looking back at the past five fiscal years, the average two-year MBA fellowship award grew from $19,524 for the Class of 2003 to $35,400 for the Class of 2008. Total fellowship spending for fiscal 2007 increased by $3 million, or 15.8 percent, from last year to a record $22 million. Because of this growth, the average MBA loan balance at graduation in fiscal 2007 fell to $77,550, compared with $83,310 in fiscal 2006. HBS continues to seek ways to assist MBA students in alleviating this burden, and thus broaden their career opportunities in both the private and the public sectors.

Publishing and Printing

Publishing and printing expense includes HBSP production costs as well as a small amount of spending to produce the School's other printed materials and publications. Increases in these expenses were modest from fiscal 2002 through fiscal 2005, mainly due to lower costs for printing and paper, marketing, and author royalties at HBSP.

Reflecting the marketing investments and FTE growth at HBSP that have fueled the publishing unit's recent revenue growth, publishing and printing expenses have increased significantly in the past two fiscal years, rising by $9 million to $51 million in fiscal 2007. Approximately $3 million of this increase was related to market-driven HBSP spending, and the balance was caused by a shift in accounting for these costs from the supplies and equipment line item.

Space and Occupancy

HBS is responsible for managing its own campus; facilities maintenance and construction are not centralized University responsibilities as they are at many other schools. The HBS campus currently includes 33 buildings encompassing more than 1.5 million square feet. Space and occupancy expense includes costs related to maintaining and operating these buildings and associated campus infrastructure.

In addition, facilities improvement and renovation costs that do not qualify as capital expenses are categorized as space and occupancy costs. Also included are expenses related to dining facilities and other campus services, as well as costs associated with leased space that houses HBSP's operations. Residence expenses for executive program participants—equivalent to the cost of goods sold in Executive Education—also are reported under space and occupancy.

HBS has constructed approximately 43,000 square feet of occupied space since fiscal 2002, enlarging the size of the campus by 3.5 percent, while renovating approximately 268,000 square feet of space. Reflecting this facilities' expansion and increased utilities and energy costs, in the past five years space and occupancy expenses have risen at a compound annual rate of 5.9 percent. The increase in fiscal 2007 was $2 million, or 5.3 percent, slightly lower than the five-year average as a result of slower growth in expenses for utilities and energy.

Supplies and Equipment

The School tightly controls expenses for supplies and equipment, and the underlying cost level in this area has remained stable for the past two years. As a result of the shift of some costs to HBSP in fiscal 2007, supplies and equipment expense, as reported, declined by approximately $6 million from a year earlier.

Professional Services

Professional services expenses increased to $25 million in fiscal 2007, from $22 million in fiscal 2006. The increase mainly reflected greater use of outsourcing to supplement the School's internal capabilities as HBSP deployed new IT infrastructure in its migration toward a digital product platform.

University Assessments

Expenses for University assessments are calculated as a percent of the School's total expenses on a two-year lagged basis. These assessments cover essential services provided to HBS by the University, including payroll and benefits administration, processing of accounts receivable and payable, and legal services. University assessments increased by $1 million in fiscal 2007 to $11 million.

Debt Service

The School's debt service, which consists of interest payments to the University on building and other University debt, rose in fiscal 2007 to $7 million from $4 million in fiscal 2006. Debt service had remained essentially level for several years prior to fiscal 2007, as new borrowings for campus renewal and construction were offset by debt principal repayments made possible by alumni gifts. A general decline in the interest-rate paid by the School to the University also contributed to stable debt service levels. This rate is determined annually by the University, and is based on the University's weighted average debt rate.

Other Expenses

Other expenses rose to $31 million in fiscal 2007, from $28 million last year. The School incurred higher costs in fiscal 2007 as a result of the faculty's increased international travel, as well as executive program enhancements. Other expenses in the prior year were reduced by a one-time credit to a reserve account.

Debt service increased in fiscal 2007 due to the accounting transfer of large amounts of debt from construction-in-progress to placed-in-service. This transfer reflected prior investment in three of the School's largest recent capital projects: the renovation and restoration of Baker Library and the renovation of Hamilton Hall and Aldrich Hall.