Harvard Business School funds its operations with a mix of revenue sources that is unique among Harvard University schools and in higher education. Two of the School’s business units—Harvard Business Publishing (HBP) and Executive Education—typically generate more than 50 percent of total annual revenues, making HBS less reliant on its endowment than other schools.
HBP and Executive Education not only contribute income for operations but also enable the School to influence the practice of management on a larger scale. Faculty research at HBS is funded primarily by the School, not by outside sponsors such as government agencies, foundations, and corporations. Unimpeded by the constraints associated with external funding, HBS faculty are free to pursue the research opportunities they believe have the greatest potential to create new knowledge.
The School globally disseminates the intellectual capital produced by the faculty through Executive Education programs and HBP’s portfolio of magazines, books, cases, and eLearning products. Completing the self-sustaining cycle, margin contributions from HBP and Executive Education serve as the primary sources of funding for the faculty’s research.
Revenues generated by HBP and Executive Education are sensitive to long-term trends in the economy and the capital markets. The School’s endowment distribution revenues follow a similar pattern. In fiscal years such as 2010, however, short-term dynamics can affect each of these sources of income in different ways.
Reflecting investment losses in the prior year, the School’s fiscal 2010 endowment distribution revenue fell by $12 million from fiscal 2009. The recessionary slowdown in customer demand for some publishing products reduced HBP’s revenue by $2 million. Interest income and revenue in the Housing, Rents, & Other category also fell, decreasing by approximately $6 million on a combined basis.
These declines, however, were nearly offset by better-than-expected performance in other areas. Executive Education and MBA tuition and fees revenues rose by a combined $14 million, reflecting higher enrollments and increases in tuition and fees. In addition, revenue from unrestricted current use gifts grew by $1 million. As a result, total revenues declined by only $5 million to $467 million, or 1 percent, in a challenging year, demonstrating how diversity at the top line adds strength, consistency, and predictability to the School’s business model.
Tuition and fees revenue from the School’s core academic program grew to $92 million in fiscal 2010, from $84 million in fiscal 2009. This increase reflected a rise in total MBA enrollment of 55 students, or 3 percent, from the prior year. The School continues to set tuition at levels that recover rising program delivery costs and investments designed to enrich the HBS educational experience.
First-year MBA tuition in fiscal 2010 was $46,150—near the midpoint among the seven comparable schools tracked by the School—compared with $43,800 last year. MBA tuition and fees amounted to 20 percent of the School’s total revenues in fiscal 2010, compared with 18 percent a year earlier.
Fiscal 2010 was a strong year for Executive Education as tuition revenue grew nearly 6 percent to $113 million, from $107 million in fiscal 2009. This represented 24 percent of the School’s total revenue, compared with 23 percent last year. Total applications to open enrollment and custom programs were roughly flat from the prior year at nearly 11,800. But total Executive Education enrollment increased by nearly 400, or 5 percent, to approximately 8,700, after falling by more than 1,100 in fiscal 2009.
Total HBP revenue decreased by $2 million, or 1 percent, in fiscal 2010 to $135 million, from $137 million last year. The publishing operation generated 29 percent of the School’s total revenue, the same percentage as in fiscal 2009. Growth in sales of eLearning products nearly offset declines in advertising and circulation revenue at Harvard Business Review (HBR). Reflecting continued stability in the academic market, sales of Harvard Business Press books and HBS cases and teaching materials were flat with the prior year.
Revenue from gifts to HBS—in the form of endowment distributions and unrestricted current use giving—totaled $114 million in fiscal 2010, and represented 25 percent of total revenue—a smaller percentage than at most other Harvard schools. The University’s Faculty of Arts and Sciences, for example, relied on endowment distributions and current-use gifts to support 58 percent of its operating budget for fiscal 2010.
Nonetheless, income from gifts is crucial to the School’s business model, and fiscal 2010 was a strong year for fundraising at HBS. Generous supporters gave $130 million in new gifts and pledges—the second highest annual total in the history of the School. Total cash received from gifts grew 60 percent to $59 million, from $37 million in fiscal 2009. This included new endowment gifts and gifts for capital projects, and payments on prior years’ pledges, as well as restricted and unrestricted current use giving.
Although unrestricted current use gifts have represented only about 3 percent of total revenue for the past two years, they provide crucial funding for new initiatives and remain a key fundraising priority for the School. Revenue from unrestricted current use gifts rebounded in fiscal 2010, rising 8 percent to $13 million after falling 14 percent to $12 million during the market collapse in fiscal 2009.
HBS received gifts and pledges of all types from more than 12,900 donors during the year, including MBA, Doctoral, and Executive Education alumni, as well as other friends of the School. More than 27 percent of the School’s MBA alumni gave to HBS in fiscal 2010, compared with 24 percent in fiscal 2009.
The School’s endowment distribution revenue fell by $12 million, or 11 percent, from last year to $101 million. This decline reflected the University’s decision to reduce the percentage of investment returns made available for operations in light of the drop in the endowment’s market value in fiscal 2009. The actual decline in the School’s fiscal 2010 endowment distribution was $3 million less than initially budgeted, however, due to diligent efforts to minimize unspent fund balances during the year. Endowment distribution represented approximately 22 percent of the School’s total revenue in fiscal 2010, compared with 24 percent in fiscal 2009.
After the fiscal 2010 distribution, the School’s endowment and current use funds totaled $2.3 billion at year-end, up by $194 million, or 9 percent, from $2.1 billion at June 30, 2009. The increase in the market value of the endowment for fiscal 2010 reflects $33 million in endowment gifts received by HBS during the year—up from $18 million in fiscal 2009—as well as net appreciation in endowment principal of $161 million after subtracting the annual distribution and decapitalizations.
Like other Harvard University schools, HBS raises its own endowment and current use funds. The School independently budgets the use of endowment distributions to support operations according to the terms of each gift. The HBS endowment, along with those of the other Harvard schools, is managed by Harvard Management Company (HMC), a subsidiary governed and wholly owned by the University. The absolute return on the University’s pooled investments, including the endowment, was +11.0 percent in fiscal 2010, net of all expenses and fees, compared with –27.3 percent for fiscal 2009.
The HBS endowment comprises more than 1,000 discrete funds established over the years by individual donors, corporations, and reunion classes. Although most endowment gifts are made in perpetuity, allowing little or no access to principal, some allow access to principal to provide the School flexibility in achieving the purposes for which they were designated. In addition, the School occasionally draws on capital appreciation associated with prior-year gifts. Funds from these decapitalizations are used to support key initiatives in keeping with donor intentions.
Harvard determines the amount that can be prudently be drawn from the endowment to spend in any given year. The payout rate reflects past endowment performance and HMC’s projections of future investment return, consistent with the goal of providing the Harvard schools with a reliable stream of operating income over the long term. In the years before the 2008 financial crisis, the University’s long-term target was to distribute between 5 and 5.5 percent of the endowment’s year-end market value annually. This distribution included an assessment of 0.5 percent of the market value to cover a portion of University central administration costs.
Given the unprecedented drop in the value of the endowment in fiscal 2009, the University decided to temporarily exceed the range of 5–5.5 percent in order to continue providing the Harvard schools with sufficient income for operations. This increased the spending percentage for fiscal 2010 to 6.1 percent. In an effort to return closer to the long-term target, midway through fiscal 2010 the University decided to reduce the endowment distribution for the upcoming 2011 fiscal year. As a result, although the endowment’s fiscal 2010 return totaled +11.0 percent, the School’s endowment distribution for fiscal 2011 is budgeted to decline from the prior year by $4 million, or 4 percent.
Revenue in the Housing, Rents, & Other category declined by $2 million, or 15 percent, in fiscal 2010 to $11 million. This marked a return to normal revenue levels following a strong fiscal 2009 driven by fees related to the Global Business Summit hosted by HBS in fall 2008. The School’s interest income also fell in fiscal 2010, dropping by $4 million, or 67 percent, to $2 million due to lower interest rates.