Harvard Business School

Part of being a "successful" institution is figuring out how to pay your way—and, just as important, how to change that success formula in response to changing conditions. Or, stated in terms of mission, only a going concern with a workable financial model can effectively support a mission.

At the School's founding, its financial model was relatively simple: tuition revenues, and—for the first five years—annual infusions of $25,000 from a combination of individual and institutional supporters of the experiment in business education. Since tuition in the School's first year of operation only added up to about $4,000, this early "venture funding" proved critical.

Other trends underscored the problems inherent on being tuition-dependent, at least in those early years. Tuition was fixed at $150: the same fee charged by both Harvard College and the Graduate School of Arts and Sciences. So for Dean Edwin Gay and his Business School colleagues, raising tuition was not an option.

Nor could increasing the numbers of students enrolled be counted upon to address the School's precarious financial condition. More students would have required more faculty, thereby wiping out the gains of an increased enrollment. Of even greater concern was the second year: Only 207 of the 1,442 students who enrolled at HBS in its first eleven years of operation stayed for the full two-year program. (This reflected a number of factors, including the near-total lack of financial aid, the poor reputation of the second-year curriculum, and the job offers that a first-year "graduate" could command.) To beef up tuition revenues, the School reluctantly admitted a number of special students, who enrolled mainly in industry-specific courses. In 1911, for example, the Technique of Printing course had two MBA candidates and a dozen tuition-paying special students enrolled. In addition, the Boston-based Society of Printers had contributed $7,000 to support this and similar courses—a pattern that recurred a number of times in those early years.

From early on, the School's leaders realized that the unusual and unprecedented kinds of research that the School needed to conduct could not be sustained by tuition. In 1910, the president of United Fruit established a five-year traveling research fellowship at the School: the first formal funding in support of research at HBS. In the following year, Chicago publisher Arch Shaw donated $2,200 to support research into the economics of marketing and distribution. This money helped underwrite the first work of the Bureau of Business Research—and donations have helped fund the School's research activities ever since.

Very early, Dean Gay began seeking endowment to support HBS—an increasingly urgent proposition, as the clock ticked down on the School's initial five-year funding period. President Lowell turned down Gay's request for a University-sponsored $1 million fund drive for the School in 1911, and subsequently blocked several of Gay's proposed fundraising initiatives. Gay found himself in the difficult position of having no natural allies: There was no HBS alumni population to speak of, and most of Harvard's alumni felt no particular allegiance to the new Business School.

The first good news on the endowment front came in 1912, when Edmund Cogswell Converse, president of New York-based Bankers Trust, gave HBS $125,000 to establish a professorship in banking and finance. Three years later, a group of New York businessmen established a chair honoring railroad magnate James J. Hill. Hill subsequently decided to double the chair's endowment, and encouraged the School to use any funds not spent on transportation-related studies to support the School's general needs. Dean Gay, who had been personally responsible for closing the School's budget deficits since 1913, was especially gratified by this infusion of funds. But the School's financial woes were far from over. Although the endowment principal had grown from nothing to more than $450,000, in 1917 it generated an income of only $20,492: significantly less than the tuition income of $34,705. With relatively fixed expenses, the School remained vulnerable to declines in enrollment.

This was starkly illustrated in 1918, when—thanks to the U.S.'s entry into World War I—the HBS tuition-paying population plummeted to 32: down from 232 in the 1916-17 school year. By cutting expenses to the bone, the School managed to lose only $4,000; and when the war ended, students returned to HBS in droves. (By the fall of 1919, 412 students were enrolled: more than double the previous high, reached in 1916.) But the need for a stronger financial model, especially in support of "discretionary" activities like research, was clear.

The Harvard Business Review, first published in October 1922, was the first experiment in this direction, and was an inexact parallel to the student-run Harvard Law Review. But after making a profit of $468.29 in its first year, HBR lost money for the next twenty years. The successful completion of the campus in the late 1920s created a much-needed stream of rental income from the dormitories, but—like tuition—this income was highly variable depending upon enrollments, which tended to stay high in the first year or two of a recession, but then plunge.

Like the rest of Harvard, and much of higher education, the School actively began pursuing endowment. President Lowell—initially skeptical in response to the newly installed Dean Donham's urgent request to be allowed to seek new endowment aggressively—ultimately acceded to Donham's demand. One compelling reason to grow the School's budget through endowment income was to retain the faculty: In the fall of 1926, something like 40 percent of the faculty had received "shockingly good" offers from industry and other schools. The maximum salary at HBS—attained only after 15 years of service—was $8,000; one university chancellor let it be known that he would pay $20,000 to the HBS professor who would come launch a business school at his institution.

In 1927, George F. Baker helped enormously in the quest for endowment by contributing $1 million in addition to the $5 million that he and his son had already pledged for the construction of the Soldiers Field campus. Baker's gift was a challenge grant, of sorts: Donham had to match it with a million dollar gift from another source. He did so with a pledge from William Ziegler, head of the Royal Baking Powder Company. With the School's finances improving—in fact, showing a $90,000 profit in 1927 and 1928—Donham was able to retire the School's debt to the University for cost overruns on the campus.

In this same period, though, Donham struggled to find additional research funding—both to support case writing and to pursue project research. Elton Mayo and the Hawthorne research were only possible because Mayo arrived at HBS with his own funding from the Laura Spelman Rockefeller Foundation, and because Donham assured President Lowell that the hiring of Mayo was "definitely experimental," with no obligation on the University's part to subsidize it. Three additional Rockefeller grants in the late 1920s and early 1930s helped underwrite the "Industrial Research" program for most of the 1930s.

But still more research funding was needed. To meet this need, Donham and his administrative team created a novel entity: the "Two Hundred Fifty Associates of the Harvard Business School." A non-profit association under the laws of Massachusetts, the group's 250 members each would agree to give an annual gift of $1,000 to support research at HBS. The approximately $550,000 raised by this group played a critical role in keeping the School's research and course development efforts alive during the Depression.

The Depression also brought hard times for many of the School's students. Applications dropped 36 percent between 1931 and 1932, and the percentage of students returning for their second year also declined (from almost 90 percent in 1929 to just over 80 percent in 1933).

Financially speaking, the School remained a shaky enterprise throughout the 1930s—a fact that the long-serving Dean Donham found increasingly discouraging. After building a campus and increasing the School's endowment from approximately $500,000 in 1919 to almost $3 million in 1938, and despite spending upwards of 80 percent of his time raising funds, the School in 1938 had cash reserves of only $24,000. He felt, he told Harvard President James Conant, "a personal responsibility to finance the activities of this School as they exist when I retire. Otherwise, my successor might be seriously embarrassed."

Fortunately for that successor—Donald K. David—that did not come to pass. The principal reason was that as U.S. entry into World War II approached, Donham took steps to recreate the School as a de facto extension of the Armed Forces. A new degree program (the "Industrial Administrator" program) emphasized production over marketing and policy; when MBA enrollment dropped from 850 in the fall of 1940 to 501 in the fall of 1941, most of the enrollment deficit was made up by the 295 students in the first Industrial Administrator class. In addition, multiple specialized training contracts were signed—with the Navy, the Quartermaster Corps, and the Army Air Corps, among others—so that most of the faculty could be retained at Soldiers Field, and so that the shrinking pool of traditional students could be replaced by an incoming flood of military trainees.

Although the war disrupted almost every aspect of HBS's traditional operations, it also opened the door to a new postwar business model. The "War Production Training Program"—launched on February 1, 1943, and designed to "retool" older executives so that they could perform useful war-related service in the manufacturing sector—proved an unexpected success. Many on campus and elsewhere doubted that older business men were mentally flexible enough to learn; the "retread" program (as it came to be known) proved them wrong. Gradually, the program shifted its emphasis from pure production training to a broader supervisory focus; and toward the end of the war, it was renamed the "Management Training Course." In April 1945, the HBS faculty approved a continuation of the program—soon to be renamed the "Advanced Management Program"—into the postwar period, with tuition set at $600 for the 15-week course. Thus was born executive education at HBS, which in subsequent decades not only created new research opportunities and allowed for curricular innovations, but also helped diversify the School's financial base.

The postwar years also saw other trends converge to the School's financial benefit. Returning veterans almost overwhelmed the School, which ran year-round for several years to accommodate the crush of would-be MBA candidates. (In its 37 years of existence as of 1946, the School had awarded 7,757 degrees; now almost as many students were expressing interest in being admitted in the coming year.) The faculty grew only marginally, and the combination of relatively large revenue increases and modest increases in expenses helped the School out of the financial woods it had inhabited in the prewar years.

Meanwhile, almost a quarter-century of investments in the Harvard Business Review began to pay off. In 1947, the magazine made its first profit since 1923, and soon began returning a modest profit to the School to support faculty research.

Nevertheless, Dean David was far from sanguine. Toward the end of the war, he reported to President Conant that the School's endowment income—still below $150,000 annually—could not sustain the School's ambitious postwar plans. (Only one chaired professorship had been established since the 1920s: an unacceptable performance.) In a "Notes and Comment" entry of a January 1947 issue of The New Yorker, entitled "Physician, heal thyself," the magazine noted that "for the fiscal year ending June 30, 1946, the Harvard School of Business Administration showed a deficit of $186,809.71." This was more an accrual-accounting issue than a flawed business model—on a cash basis, the School actually showed a profit of several thousand dollars—but it was not the kind of publicity David wanted for the School.

With Conant's permission, therefore, the well-connected David committed himself to raising an additional $15 million in endowment, which would constitute a 300 percent increase. He didn't quite reach this goal in his deanship (1942-55)—the actual total in 1954 was just over $10 million—but he nevertheless made significant progress, securing construction and endowment funding for Aldrich and Kresge Halls, as well as seven new professorships. These fundraising successes grew ever more important as the School's operating budget steadily increased—from $1.2 million in 1942 to more than $4 million in 1955. In 1956, as the newly appointed Dean Stanley Teele reported to Harvard President Nate Pusey, the School's income exceeded its expenses by $63,501.

David—who helped organize the Ford Foundation, and served on its board—also played a critical role in establishing strong bonds between the School and the Foundation, which came to see HBS as a useful laboratory for its experiments in improving management education in the U.S. and abroad. In 1954, for example, with the University's blessing, Ford contracted with HBS to help establish a new management school in Istanbul, Turkey. A year later, Ford gave HBS a $2 million grant to establish two research professorships at the School. Throughout much of the 1950s and 1960s, in fact, Ford and other foundations helped fund significant innovation at HBS—thereby taking considerable pressure off both the operating budget and the School's leadership.

In this same period, HBS alumni also began coming into their own. To some extent, this simply reflected the passage of time: HBS graduates from the 1920s and 1930s had now been working for several decades. Many had prospered, and many felt strong bonds to the School. But their numbers were increasing dramatically, as well: Thanks in large part to the huge postwar enrollments, the School now counted some 21,000 alumni—three times as many as a decade earlier— in 75 countries. With some modest help from the School, HBS alumni were increasingly well organized. By 1955, the Harvard Business School Association comprised 52 clubs around the world, and 50 permanent class secretaries (up from 13 in 1949) were contributing class notes to the alumni Bulletin. Contributions to the HBS Fund—launched in 1950, when it raised $60,000 from 1,200 alumni—totaled $141,664 in 1954: up 36.9% over the previous year.

But still more needed to be done: Upon assuming the HBS deanship in 1962, George P. Baker was astonished to learn that the School, once again, was effectively broke, and he was took steps to fix what was broken. On the expense side, he established a new office for financial planning and control. On the revenue side, he raised tuition (from $1,500 to $1,750). He launched a number of initiatives aimed at increasing the School's endowment. One of the first steps that Baker took in this direction was to organize a formal program to solicit bequests to the School. Up to that point, HBS had received only 12 bequests in its history, and Baker was convinced that the School could do better. A test mailing was prepared and sent out to seven pilot classes; this exploratory foray generated 28 bequests.

Concurrently, Baker asked Marvin Bower—a member of the MBA Class of 1930, and the head of the consulting firm of McKinsey & Co.—to head a committee charged with studying the relationship between HBS and its alumni. Following the recommendations of Bower's team, Baker substantially professionalized the School's fundraising efforts and other aspects of its relations with its alumni. The results were both positive and immediate: In 1966, for example, 11,263 alumni (42.4% of the total population) contributed $700,000 to the HBS Fund: a 500% increase from a decade earlier. In 1969, the HBS Fund for the first time raised more than $1 million in a single year.

Alumni also began taking a more direct and important rule in specific fundraising activities. In 1967, for example, Albert Gordon (MBA '25) led a drive to build new facilities for the Advanced Management Program, and successfully persuaded some 40 companies to contribute more than $3 million to the cause.

Baker was also a superb individual fundraiser: far better connected to the business community than his immediate predecessor, Stanley Teele, and by nature a warm and outgoing person. In his relatively short (eight-year) deanship, Baker raised the funds needed to establish 22 chairs—almost twice as many as had been established in the entire previous history of the School.

Baker's successor, Lawrence Fouraker, inherited a stronger financial foundation, but also had to deal with a deep recession early in his tenure—a recession that illustrated that the School financed itself on a short-term basis, and that most of the School's income streams were vulnerable to economic downturns. Current gifts, as Fouraker noted in his first report to President Derek Bok, accounted for more than 40% of the School's income, compared with 17% University-wide. He cautioned that academic enterprises (including his own) matched "very soft resources against very firm . . . expenses." For this and other reasons, Fouraker adopted a no-growth model, and launched a comprehensive program of budget cuts and revenue enhancements. For example, he cut $200,000 in computer-related expenses out of his 1972 budget, and in two years cut the full-time staff total (including faculty) from 631 to 598. Noting that MBA tuitions covered less than 40% of the costs of that program, and also that faculty salaries were low and that MBA starting salaries were high, Fouraker (with the approval of the faculty) raised tuition substantially over the decade of his deanship—a policy that continued in subsequent HBS administrations.

These economies and revenue-enhancements, combined with an improving national economy, helped stabilize the School's finances. Other factors also contributed: the realization of a $1.26 million gift from the estate of Grace Ditman, used to build Cumnock Hall; a write-up of the book value of the University's overall endowment—which helped "grow" the School's part of that endowment from $33.4 million to almost $43 million "overnight"—and Fouraker's own fundraising prowess. To almost everyone's surprise (including his own), Fouraker raised another 15 chaired professorships, increasing the total number of HBS chairs to 50. In 1979-89—Fouraker's final year as dean—the HBS Fund brought in $3.5 million: up 25% from the previous year.

In the 1980s, at the urging of Dean John McArthur and under the supervision of Professor Hugo Uyterhoeven, the School substantially upgraded the quality of its relationship with its alumni. In particular, this translated into reunions that had far more intellectual content than in the past. It also translated into a focus on the HBS campus as the best venue for alumni gatherings and other meetings of the "extended HBS family," in part because the continuing reinvestment in the School's physical plant made Soldiers Field a more functional and attractive setting. Again, the results were positive: the HBS Fund total in 1982 reached an all-time record high of $6.7 milion, and by 1986, this total had almost doubled (to $12.5 million). Special attention also was paid to 25th and 30th reunion classes. In 1984, for example, the Class of '59 celebrated its 25th reunion with a record gift of more than $1.5 million; two years later, the Class of '61 raised $2.75 million.

Self-confident and personable, McArthur also proved a formidable one-on-one fundraiser. In his 14-year deanship, he raised a remarkable 33 faculty chairs, as well as funds dedicated to doctoral programs, faculty innovation, student scholarships, and a host of other activities. He also invested heavily in the School's revitalized publishing operation—primarily, he later said, to make sure that the School's intellectual capital was broadly distributed, but also to capture some of the returns on the School's ever-growing investments in research. At the same time, McArthur quietly "pruned" a number of HBS ventures that had outlived their usefulness, and recommended that other parts of Harvard impose the same discipline on themselves.

Kim Clark, McArthur's successor, continued to invest in the growing publishing enterprise, which was emerging as an increasingly important piece of the HBS business model. (In 2003, for example, HBS Publishing sold 771,000 books, 6.7 million cases, and 3 million HBR reprints.) He also revitalized a second "leg of the stool" by encouraging his faculty colleagues to broaden the School's menu of executive education offerings, including a significant expansion of shorter, customized programs. Clark continued his predecessor's pattern of gradually adding tenured professorships—13 in his first six year in the deanship, from an increasingly disparate array of donors—and also securing endowments devoted to scholarships and other specific purposes.

Clark also mounted the School's first formal capital campaign since the drive to build the Soldiers Field campus in the 1920s. Headed by Richard "Dick" Spangler (MBA '56), and led internally by Professor Howard Stevenson, the campaign articulated what appeared to be an ambitious goal: $500 million. But by the time the campaign was completed in 2006, nearly $600 million had been raised, including 150 new fellowship funds totaling more than $122 million and $35 million in unrestricted gifts. (In 2005, HBS awarded almost $12 million in fellowship aid: a $5 million increase over the 2000 aid total, made possible largely by proceeds from the campaign.) Major gifts in support of entrepreneurship, the HBS doctoral programs, international research and course development, campus renewal, entrepreneurship, teaching skills, and the library also took pressure off the operating budget, and provided the School with a margin for experimentation and innovation.

Coincident with the launch of the campaign, HBS published its first formal financial report, which set a new standard for transparency in the School's operations and financial circumstances. The inside cover of the 2007 edition of the HBS Annual Report—the report summarizing the School's financial state in the final year before its centennial celebration—featured on its inside front cover a sepia picture from the spring of 1927 depicting a newly completed Baker Library on its inside front cover, with a row of newly planted 12-foot elm trees lined up along Morgan Way, staked in place to protect them from the wind. It was the only antique note in the report. In his introductory letter, Dean Jay Light emphasized that the School planned to look forward, more than back, as it celebrated its centennial year, and to find "new ways to support our unique culture and community."

The financials in the back of that report depicted an organization with a healthy and diversified revenue model. It generated $30 million in cash from operations ($375 million in expenses against $405 million in revenues). Its endowment stood at $2.8 billion (up from $1.5 billion in 2003, and up from $14 million in 1962). Its total revenues had increased by $37 million (or 10.1 percent) from the previous year, and its total revenues had grown at a compound annual growth rate of 7.2 percent over the previous five years. MBA Program revenues totaled $77 million; revenues from Executive Education and HBS Publishing totaled $219 million; while gifts to HBS (including both distributions from the endowment and current-use gifts) made up the balance.

On the expense side, the report noted that 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." Because compensation for faculty and staff was the single largest expense, those totals were monitored carefully. The faculty head count was down slightly (to 206, from 215 in 2006). The staff head count had increased slightly (from 1,077 to 1,109). Another key expense was student fellowship spending, which (the report noted proudly) had increased at a compound annual rate of 14.4 percent over the previous five years (from $14 million to $22 million), thanks largely to proceeds from the recently concluded capital campaign and additional gifts.

Obviously, the School was enormously different than it was on that spring day in 1927, just as the new campus was opening, and a new era in the life of the School was beginning. But it seems likely that the dean of that day—Wallace Donham—would have understood and endorsed today's disciplined, mission-based business model, which brings together multiple tuition streams, revenues from publications in support of research, and gifts from individuals and institutions that believed in the School's means and ends.