Harvard Business School's economic model is unique among the Harvard University schools and in higher education. Internally funded faculty research has long been the core of the model. Because HBS self-funds research, faculty members are free to pursue the opportunities they believe have the greatest potential to create new knowledge, without the constraints associated with funding from external organizations.

When transformed by the faculty into HBS cases, this new knowledge sparks the dynamism and focus on cutting-edge business issues that distinguishes the educational programs at the School. At the same time, the intellectual capital created by the faculty is disseminated by Harvard Business Publishing (HBP) and the School's Executive Education group in corporate and higher education markets around the world. Margin contributions from these competitive business units complete the self-sustaining cycle by serving as the primary sources of funding for the faculty's research.

Although income from HBP and Executive Education makes HBS less reliant on its endowment than other schools at Harvard, alumni generosity has become increasingly important to the School's economic model in recent years. Giving to the endowment, as well as unrestricted current use giving, supplements income from publishing and executive programs and provides the School with additional financial stability and flexibility.

The revenues generated by HBP and Executive Education in any given year are sensitive to trends in the economy and the capital markets, as are income from the endowment and alumni current use giving to the School. These trends remained favorable in fiscal 2012.

On a combined basis, HBP and Executive Education revenues grew by $23 million, or 8 percent, from fiscal 2011 to $307 million. This represented 56 percent of total revenues—the same percentage as in fiscal 2011.

Distributions of income from the HBS endowment have ranged between 20 and 24 percent of total revenues at HBS for the past several years. In fiscal 2012, the School's endowment distribution revenue increased by $9 million, or 9 percent, from fiscal 2011 to $109 million. This equaled 20 percent of total revenues, flat with the prior year's 20 percent. Revenue from unrestricted current use gifts grew by $2 million year-over-year, climbing from $17 million to $19 million.

The School's total revenues for fiscal 2012 rose by $37 million, or 7 percent, from fiscal 2011. In addition to higher HBP, Executive Education, endowment distribution, and current use giving revenues, this growth reflected a $3 million increase in revenue from MBA tuition and fees. The School's other revenue categories—income from housing rents and interest—were flat with the prior year.

MBA Tuition & Fees

HBS sets MBA tuition and fees at levels that do not fully recover annual operating expenses, much less the School's long-term investments in MBA program innovation. The shortfall is offset primarily with income from gifts given by alumni, whose generosity enriches the HBS educational experience for future generations of students. First-year MBA tuition in fiscal 2012 was $51,200—near the midpoint among the seven comparable schools tracked by HBS—compared with $48,600 last year. Tuition and fee revenue from the School's core academic program grew to $99 million, from $96 million in fiscal 2011.

Executive Education

Executive Education found new ways to improve capacity utilization in fiscal 2012, enabling the business to continue its top-line growth. Reflecting continued solid demand for open enrollment and custom programs—particularly those offered outside the United States—total participant enrollment in fiscal 2012 was essentially flat with the prior year at 9,900. Executive Education tuition revenue grew 8 percent to $142 million, from $132 million a year earlier.

Harvard Business Publishing

The School's publishing business continued to successfully navigate a challenging industry environment in fiscal 2012. HBP more than offset the impact of the global economic slowdown, particularly in Europe, with double-digit growth in eLearning product sales, as well as higher Harvard Business Review circulation revenue and stronger sales of HBS cases. HBP's revenue grew by $13 million, or 9 percent, from fiscal 2011 to $165 million.

Gifts & Endowment

Gifts to HBS have been playing an increasingly important role in supporting the School's operations for the past 10 years. Fiscal 2012 was no exception as revenue from gifts—in the form of the endowment distribution and current use giving—increased to $128 million, or 24 percent of total revenues, from $117 million in fiscal 2011.

Like other Harvard schools, HBS raises its own funds, and the School's fundraising results exceeded internal expectations in fiscal 2012. Continuing to demonstrate extraordinary involvement and generosity, the HBS community gave a record $129 million in new gifts and pledges to the School, compared to $77 million in fiscal 2011.

HBS received gifts from more than 12,000 donors in fiscal 2012, including MBA, Doctoral, and Executive Education program alumni, as well as other friends of HBS. As in fiscal 2011, approximately 27 percent of the School's MBA alumni gave to HBS during the year. Total cash received from gifts, including new endowment gifts and gifts for capital construction projects, payments on prior years' pledges, and restricted and unrestricted current use giving, decreased 24 percent to $68 million from $89 million in fiscal 2011, which included an initial $25 million cash payment for construction of Tata Hall.

Fiscal 2012 marked the School's third consecutive year of double-digit growth in unrestricted current use giving. Revenue from these flexible gifts increased 12 percent to $19 million, from $17 million in fiscal 2011, providing critical funding for several new programs related to the School's five strategic priorities.

The School's endowment distribution revenue, meanwhile, reversed two years of decline in fiscal 2012, increasing 9 percent to $109 million. The HBS endowment currently consists of more than 1,000 discrete funds established over the years by individual donors, corporations, and reunion classes. The School budgets the use of endowment distributions to support operations according to the terms of each gift. Funds within the HBS endowment, along with those of the other Harvard schools, are managed by Harvard Management Company (HMC), a subsidiary governed and wholly owned by the University.

The University determines the payout rate—that is, the percentage of the endowment withdrawn in any given year and distributed for operations and for strategic purposes. Consistent with the long-term goal of balancing the maintenance of the endowment's purchasing power for future generations and the desire to pursue nearer-term opportunities, the University's targeted annual payout range is between 5.0 and 5.5 percent.

The University's payout rate for fiscal 2012 was 5.5 percent, compared to 5.3 percent for fiscal 2011. HBS continued its efforts to maximize the use of investment income from existing endowment funds, while receiving a number of new endowment gifts. As a result of the payout increase and new gifts, the School's fiscal 2012 endowment distribution increased 9 percent from the prior year to $109 million.

The absolute return on the Harvard endowment for fiscal 2012 was essentially flat, net of all expenses and fees, compared to +21.4 percent for the prior year. As long-term investors, HMC manages the University endowment with three primary objectives: growth, liquidity, and risk management. Although growth in the endowment's market value for fiscal 2012 was well below long-term averages, the University's investments benefited from the improved liquidity and risk management that HMC has built into the portfolio over the past several years.

From a longer-term perspective, the average annual return on the University endowment for the past 20 years has been 12.3 percent. This exceeds HMC's performance benchmark by more than 300 basis points per year and the return from a simple 60/40 percent stock/bond portfolio by even more substantial margins.

The fiscal 2012 year-end market value of the HBS endowment, plus the School's current use funds, was $2.7 billion at June 30, 2012, compared to $2.8 billion a year earlier. This decline reflected the flat net appreciation in market value and the subtraction of the School's annual distribution and decapitalizations, offset by $23 million in endowment gifts received by HBS during the year.

Endowment Returns

Harvard Endowment Benchmark*
FY 12 - 0.1 % 6.71 %
FY 11 21.4 19.5
FY 10 11.0 12.6
FY 09 - 27.3 - 13.5
FY 08 8.6 - 4.4
FY 07 23.0 17.7
FY 06 16.7 10.8
FY 05 19.2 10.5
FY 04 21.1 16.2
FY 03 12.5 4.0
3-Year Growth 10.4 % 12.8 %
10-Year Growth 9.5 % 5.9 %

Industry benchmark figures for FY09–FY12 are S&P 500 / CITI US BIG; figures for FY03–FY08 are Trust Universe Comparison Service

Other Revenues

Revenue in the Housing, Rents, and Other category remained flat for the third consecutive year in fiscal 2012 at $11 million. Reflecting the stable environment for interest rates, the School's fiscal 2012 interest income also was flat with the prior year.

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Revenues: Publishing 30%. Executive Ed Tuition 26%. Endowment Distribution & current Use Gifts: 24%. MBA Tuition & Fees: 18%. Housing, Rents, Other 2%. Revenues (in millions): FY08 451. FY09 472. FY10 467. FY11 509. FY12 546. Cash Received from Gifts (in millions): FY08 51. FY09 37. FY10 59. FY11 89. FY12 68. Endowment Distribution (in millions): FY08 94. FY09 113. FY10 101. FY11 100. FY12 109. Endowment Growth (in billions) FY08 3. FY09 2.1. FY10 2.3. FY11 2.8. FY12 2.7.