The School’s major capital activities also included planning, design, and procurement for the renovation of Baker Hall, which opened as an Executive Education residence facility in 1970. Funding this project is a gift from André Esteves, cofounder and CEO of the Brazil-based investment bank BTG Pactual and a member of the School’s Latin America Advisory Board. HBS also began planning for The Ruth Mulan Chu Chao Center, a new facility to replace Kresge Hall, that will provide dining for Executive Education participants and be a hub of educational activity for the entire campus.
The School’s other major capital projects in fiscal 2013 included preparation for Crimson Commons, an interim Executive Education dining facility that will operate for about two years while the Chao Center is being constructed. Work also continued in fiscal 2013 on the tunnel system that will connect Tata Hall to McArthur Hall and the future Chao Center. Including numerous building upgrade and renewal projects across the campus as well, the School’s total capital expenses increased 53 percent to $78 million in fiscal 2013, from $51 million in the prior year.
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Income from gifts given by HBS alumni and friends—including endowment and construction gifts together with current use giving—is central to the School’s economic model. Unrestricted current use gifts are particularly crucial as a source of flexible funding for the opportunistic investments that support innovation at HBS. Reflecting the continued generosity of the HBS community, fiscal 2013 was a strong year for class reunion and annual giving at the School.
Revenue from unrestricted current use gifts rose by $3 million, or 16 percent, from the prior year to a record $22 million. This unrestricted funding was crucial in enabling the School to expand entrepreneurship programs at the Harvard i-lab and to pursue other strategic initiatives without drawing on unrestricted reserves. Total current use giving, including restricted and unrestricted gifts, increased to $43 million, surpassing the record of $36 million set in fiscal 2011.
The income from past decades of endowment giving by HBS alumni and friends supports a substantial portion of the School’s operations every year. Reflecting the strong recovery in the market value of the endowment since the global economic downturn of 2008— 2009, as well as new endowment gifts, the School’s endowment distribution revenue for fiscal 2013 increased 7 percent year-over-year to $117 million.
Given the sensitivity of the HBS economic model to conditions in the economy, our challenge as stewards of the School’s financial resources is to execute strategically in a way that is self-sustaining for the enterprise—in other words, to ensure that HBS continues to serve as a living model for what we teach. For this reason, we believe that generating an operating surplus is crucial to the School’s identity. As it has for more than a decade, HBS remained solidly cash flow positive in fiscal 2013, generating $45 million in cash from operations, compared to $42 million in fiscal 2012.
Although HBS delivered strong financial results in fiscal 2013, the School’s top-line performance in fiscal 2014 will continue to closely track the path of the global economy. Taking nothing for granted in a continually challenging environment, our financial plan for fiscal 2014 is guided, as always, by our desire to be strategically ambitious but fiscally prudent.
We are forecasting total top-line growth of 4 percent, year-over-year, in fiscal 2014. Revenue from MBA tuition and fees is projected to rise 5 percent, partially offset as always by financial aid. The University has advised the School that its fiscal 2014 endowment payout will grow 2 percent from fiscal 2013. Reflecting this anticipated payout, as well as income from new gifts to the endowment, we expect the School’s total endowment distribution revenue for fiscal 2014 to increase 2 percent from fiscal 2013—a year in which the School was very effective in using available endowment funds.
We are forecasting fiscal 2014 revenue growth at HBP and Executive Education of 3 percent and 5 percent, respectively. HBP faces ongoing competitive challenges as the publishing industry continues to evolve. There will be a modest easing in the capacity constraints in Executive Education upon the opening of Tata Hall. However, with Baker Hall going off line and Kresge Hall closing during the year, the School’s revenue growth capacity in Executive Education remains limited at this point.
We anticipate challenges in fiscal 2014 on the cost side as well. Disciplined expense management is core to our culture at HBS, but underlying costs are rising as the scope of the School’s operations expands. At the same time, HBS will be making substantial investments at HBP and Executive Education to sustain their positions of leadership and excellence and to drive continued revenue growth in an increasingly competitive marketplace.
The publishing group will be making further investments in its online products and technology platform in fiscal 2014. Executive Education margins will face greater pressure as the group delivers more executive programs abroad and begins to experience the depreciation associated with its recently constructed campus facilities. As a result, we have modest expectations for growth in income contributions from both groups as compared to fiscal 2013.
With rising operating costs across the School and lower margins at HBP and Executive Education, we can anticipate greater pressure to grow revenues from gifts and endowment distribution. Fiscal 2014 will mark the start of the Harvard and the HBS capital campaigns. The School made large investments in building staff and I.T. support infrastructure for the campaign in fiscal 2013, and these investments will grow in fiscal 2014 in preparation for the public launch of the campaign in April 2014.
These dynamics foreshadow a challenging period for operating income. Fiscal 2014 will be a year of strategic innovation in key areas at HBS. In support of the Global Initiative, for example, the School will be implementing a new approach in Latin America by hiring an executive director to be based in Brazil. Capitalizing on opportunities in online learning will be another major priority for fiscal 2014. The School’s core educational philosophy is participant-centered, active learning—an experience that is both important and complex to replicate online. Consequently, the faculty’s key challenge is to develop a distinctively HBS platform and experience that the School has named “HBX.”
This initiative will involve substantial investments in technology platform development. HBX has implications for the School’s capital budget as well. Office space for the newly created HBX operational support staff will be leased and built out during the year, as will Studio X, the School’s first fully interactive virtual classroom, which will be located in the WGBH building in Brighton.
HBS will be pursuing these and other fiscal 2014 strategic initiatives against the backdrop of rising operating costs. Our financial plan for fiscal 2014 assumes a 10 percent year-over-year increase in total expenses. This spending growth will largely occur at HBP and Executive Education and in the External Relations, I.T., and HBX groups as the School works to generate income to enable innovation and continue to deliver on its educational mission. The additional spending planned for fiscal 2014 mainly reflects higher compensation costs, as salary and benefits for faculty and administrative staff are the largest expense at HBS.
Adding faculty continues to be a key strategic priority for the School, and fiscal 2013 was a successful year for faculty recruiting. As a result, after normal retirements and planned and unplanned departures, the total size of the faculty has grown from 227 a year ago to 234 as we begin fiscal 2014. Pursuing the School’s agenda for fiscal 2014 will also require a larger administrative staff. Reflecting faculty and staff additions, as well as upward pressures on benefits costs, the School’s fiscal 2014 financial plan assumes a 9 percent year-over-year increase in total compensation expense.
Fiscal 2014 will be another active year for capital projects at HBS, in large part focused on Executive Education. The fiscal 2014 capital plan also includes a number of important campus renewal and upgrade investments. These projects are designed to prevent deferred maintenance, preserve the value of the campus, and reduce operating costs by improving energy efficiency. The School’s total capital budget for fiscal 2014 is $122 million—up 56 percent from the $78 million invested in fiscal 2013.
Declining margin contributions from the School’s competitive business units will lead to greater reliance on income from unrestricted current use gifts in fiscal 2014. The School’s goals for the upcoming HBS capital campaign reflect this reality. The campaign will be an opportunity to highlight the School’s alumni and the ways they are making a difference in the world.
HBS alumni are looking for new opportunities for engagement with the School and with each other. In connection with its preparations for the capital campaign, one of the School’s major I.T. investments in fiscal 2013 was focused on developing the first phase of a revamped Alumni website that can serve as a platform for this engagement. Launched in September 2013, the website will provide alumni with better access to the School’s educational and career development resources. It will also deliver powerful social media functionality that alumni can use to better connect with one another.
Thanks to the HBS community’s legacy of generosity, the School has the financial capacity to pursue its mission as we begin fiscal 2014. Our commitment is to sustain this legacy with responsible financial stewardship this year and in the years ahead.
Richard Melnick, MBA 1992 Chief Financial Officer 01 OCT 2013