Harvard Business School’s economic model performed impressively in fiscal 2019. For the fifth consecutive year, revenues grew faster than expenses, resulting in a double-digit increase in cash from operations. This cash flow enabled HBS to continue investing in core programs and strategic innovation, while still concluding the year in a strong financial position.

The HBS economic model is unique among the Harvard University schools and begins with our commitment to internally funded faculty research. Free from the constraints that can come with grants and other outside funding, HBS research budgets allow the School’s faculty to pursue the questions that interest them most, and to interact in the field with managers who are engaged with the most timely business challenges and opportunities.

Through its Executive Education, Harvard Business Publishing (HBP, or Publishing), and Harvard Business School Online (Online) groups, the School leverages the intellectual capital created by the faculty to educate leaders and influence the practice of management on a global scale. Completing the cycle, net operating margin contributions from Executive Education, Publishing, and Online supplement revenues from MBA tuition and alumni gifts as key sources of research funding.

Total revenue in fiscal 2019 grew 8 percent from the prior year to $925 million, while operating expenses increased 7 percent to $821 million. As a result, total net margin contribution as a percentage of revenue grew to 11.2 percent, from 10.5 percent last year and 4.6 percent five years ago. Cash from operations—the School’s operating surplus—increased more than 15 percent, from $90 million to $104 million. This surplus, beyond what it enables for HBS, plays an important role in the financial health of Harvard University and its ability to, for example, maintain its AAA bond rating. In fiscal 2019, the HBS surplus accounted for just over one-third of Harvard’s $298 million surplus.

Concluding fiscal 2019 in a strong cash position enabled the School to invest $100 million in the HBS endowment reserve, following a $65 million investment in fiscal 2018. In contrast with alumni gifts to the endowment, which are largely earmarked for fellowships, professorships, and other key student and faculty activities, the long-term stream of income from internally generated funds invested in the endowment is unrestricted.

Building the balance of unrestricted funds in the endowment reserve is an important priority for HBS. Strategic initiatives and investments in campus construction have increased the School’s fixed operating costs. At the same time, HBS is reliant on revenues from economically sensitive sources—current use giving, Executive Education, Publishing and, now, Online—to fund these higher expenses. Should revenues from these sources ever decline, annuity income from the endowment available for unrestricted purposes will be crucial to sustaining the School’s operating model.

The School also holds unrestricted reserves outside of the endowment. These reserves are instrumental in providing the School with the liquidity necessary to execute on its mission and sustain the campus through economic cycles over the long term. HBS concluded fiscal 2019 with $129 million of unrestricted reserves held outside of the endowment—up from $118 million a year earlier, and well above the $100 million we have established as the School’s liquidity management target.

One of our financial goals is for HBS to serve as a living example of a well-run organization, embodying the skills, tools, and frameworks taught across the School’s educational programs. Transparency is intrinsic to achieving this goal, and to this end our fiscal 2019 financial results are reported in detail in the Supplemental Financial Information section.

Fellowships (in millions)

Fiscal Year	MBA	Total*
FY 19	$38	$51
FY 18	37	50
FY 17	36	48
FY 16	34	47
FY 15	32	44

^*Includes Doctoral Programs and Executive Education

Investment in Research (in millions)

FY 19	FY 18	FY 17	FY 16	FY 15
$ 152	144	136	131	123

Fiscal 2019 Review

Fiscal 2019 was a year of strong financial performance. Revenues from Executive Education, Publishing, and Online were higher than expected. The resulting gains in operating leverage enabled HBS to make solid progress operationally and strategically, while still adding to the unrestricted reserves necessary to sustain the School’s future success.

At Publishing, Harvard Business Review circulation continued to grow (counter to industry trends), and products launched by the Corporate Learning and Higher Education divisions were well-received. Leveraging space in new and newly renovated buildings, Executive Education added programs and grew participant enrollment. Online generated positive net cash flow for the first time, driven by additional market offerings and a growing learner base.

Sustaining this growth—as the ways knowledge is created, delivered, and consumed are changing, and as the marketplace for learning development is becoming more crowded—will not be easy. Publishing is investing in the development of digital platforms, channels, and content. Executive Education is exploring hybrid classroom/online program models that better serve an increasingly diverse and global participant base. Online is scaling its technology and business infrastructure to meet higher market demand.

The operating income these investments help to generate will be crucial to the School over the next several years. As explained in detail in the Supplemental Financial Information, income from the endowment is sensitive to long-term trends in the capital markets. Anticipating a period of muted investment returns worldwide, the University has advised HBS and the other Harvard schools to incorporate only modest endowment distribution growth, if any, into their five-year financial plans.

Income from unrestricted current use gifts will play a larger role as well. The Campaign for Harvard Business School, which concluded in fiscal 2018, spurred remarkable growth in unrestricted current use giving. After coming in at $40 million in fiscal 2019, income from unrestricted current use giving is expected to decline in fiscal 2020 as remaining Campaign pledges are fulfilled. Returning and sustaining annual giving to the HBS Fund at or above $40 million is a philanthropic priority. We are implementing creative approaches to engage the community of HBS alumni and friends in this effort.

At the same time, we are continuing to strengthen the core activity of MBA education at the School. Some of these initiatives add programmatic complexity or incremental costs.

For example, more students at HBS are seeking to integrate the skills they are learning in the MBA program with cross-disciplinary knowledge in areas such as biotechnology and engineering. As a result, HBS has invested in building six joint degree programs. The most recent is a joint MS/MBA, offered with Harvard’s Graduate School of Arts and Sciences and Harvard Medical School, that prepares future leaders at the interface of life sciences and business. The School incurs additional operational and staff expenses to support these joint degree programs, including sharing with the partner Harvard schools a portion of the MBA tuition paid by the enrolled students. Fortunately, however, generous endowment gifts from HBS alumni have mitigated the associated financial impact.

Moreover, the School continues to seek a diverse applicant pool with respect to experience, gender, country of origin, and financial resources, among other dimensions. Beyond ensuring that the most talented future leaders apply, HBS also wishes to ensure students are supported while on campus and can pursue careers where they will have the most impact. In fiscal 2019, the School introduced a fellowship offering for MBA students with exceptional financial needs. Additionally, fellowship funds from restricted gifts were used to boost support for MBA graduates who pursue careers in Africa. These important programs add to the expense of MBA fellowships and financial aid.

In an era when careers may extend 50 years and beyond, education and personal development no longer end in a person’s 20s. The School is experimenting with new approaches to help MBA students realize that their two years at HBS mark only the start, not the end, of their learning journey. One new offering is The Reflective Leader, an Executive Education program aimed at the School’s MBA alumni 15-25 years out who are contemplating their next phase of work and life. Over the next decade, HBS will invest further in a range of offerings designed to make lifelong learning a reality rather than an aspiration.

Faculty research, the foundation for the curriculum and for knowledge dissemination, has become more resource-intensive than in the past. The faculty’s efforts to create new knowledge often involve complex projects, many of which are multi-year, global in scope, and team-based. Leading-edge computational and behavioral research methodologies, which are more expensive than traditional techniques, are gaining in usage, particularly among junior faculty. HBS typically receives few restricted gifts for faculty research in any given year, and therefore we fund nearly all direct and indirect costs with internally generated, unrestricted cash.

Before turning to the outlook for fiscal 2020 specifically, we offer a comment on the School’s capital activity this past year and prospects for the near-term future.

The years since fiscal 2011 have seen a large number of construction and renovation projects at HBS. The School’s capital investments in these major projects during this eight-year period have averaged $51 million annually. New buildings have added more than 250,000 square feet of learning, residential, and convening space to the campus, culminating in the substantial completion of Klarman Hall in fiscal 2018.

With the opening of Klarman, fiscal 2019 marked a shift toward what promises to be a multi-year focus on campus renewal and maintenance, versus the creation of new buildings, at the School. Total capital expenditures for fiscal 2019 decreased to $38 million, from $92 million in the prior year, reflecting lower costs for new construction. The School’s capital activity during the year consisted primarilyof small renewal and maintenance projects designed to prevent deferred maintenance and to enhance environmental sustainability.

Publishing Revenue (in millions)

FY 19	FY 18	FY 17	FY 16	FY 15
$ 262	240	221	217	203

Executive Education Revenue (in millions)

FY 19	FY 18	FY 17	FY 16	FY 15
$ 222	207	191	176	168

IT Investment (in millions; excludes capital expenses)

FY 19	FY 18	FY 17	FY 16	FY 15
$ 87	82	85	85	72

Fiscal 2020 Outlook

With the first quarter completed at this writing, HBS is positioned to deliver another year of solid financial performance in fiscal 2020. The School’s income-generating groups are making good progress, operationally and strategically.

The current economic expansion in the United States—already the longest in its history—will come to an end at some point. The recent softening of growth in the global economy underlines this concern. With these dynamics in mind, HBS has undertaken detailed financial scenario planning—focusing on steps that can be taken in the near term to prepare for any number of economic outcomes.

The School has long been conservative in budgeting revenues and expenses. Our plan for fiscal 2020 reflects this sense of caution. If economic conditions remain favorable, the School’s financial results are likely to outperform on both the top and bottom lines in fiscal 2020, as they have for the past several years.

Starting at the top of the Statement of Activity & Cash Flows, the School’s budget for fiscal 2020 assumes that total revenues will grow less than 1 percent from the $925 million reported for fiscal 2019. Combined revenue from Publishing, Executive Education, and Online is forecasted to increase approximately 2 percent.

Revenue from MBA tuition and fees is expected to be flat in fiscal 2020 for the first time in decades, reflecting the School’s efforts to slow the rising cost of MBA education.

Philanthropy will remain essential to the School’s financial health in fiscal 2020. The School’s ability to continue investing in innovation depends on the HBS community’s success in building on the achievements of the Campaign and sustaining recent momentum in current use giving.

We expect HBS to benefit from high single-digit growth in the endowment distribution for fiscal 2020. A portion of this growth relates to the increase in the University’s distribution rate. The balance reflects growth in the size of the endowment as a result of endowment gifts and the School’s fiscal 2019 investment in its endowment reserve.

Moving down the income statement to operating expenses, our fiscal 2020 financial plan targets an approximately 8 percent increase in the School’s total spending, compared with fiscal 2019. As in the past few years, a portion of this increase reflects the inclusion of an expense contingency to cushion the impact of margin contribution shortfalls in the event of a revenue slowdown. We will continue to closely monitor the School’s actual financial performance versus budget as the year unfolds, hoping the expense contingency will not be necessary.

Our fiscal 2020 plan forecasts an increase of approximately 7 percent in total compensation expense, driven by the past year’s growth in the size of the School’s faculty and staff, as well as higher salaries and benefits costs. The plan also anticipates a higher cost of goods sold in Publishing, Executive Education, and Online as those groups continue to grow, as well as increased information technology spending for cybersecurity and infrastructure upgrades. The School’s total capital budget for fiscal 2020 is $38 million, flat with fiscal 2019. Creating two new HBX Live studios for Online in Cumnock Hall, completing faculty office projects in Baker Library | Bloomberg Center and Cumnock as well as a renewal project in the Spangler Center, and implementing advanced campus security measures are among the largest capital projects planned for the year.

In summary, top-line growth and fiscal discipline enabled us to continue to execute on the School’s mission in fiscal 2019 and deliver a robust operating surplus for the fifth straight year. By augmenting the School’s reserves of unrestricted funds, this surplus positions HBS to further strengthen core programs and drive innovation over the long term. We remain committed to delivering sound and consistent financial results in fiscal 2020 and future years.

Capital Investment (in millions)

FY 19	FY 18	FY 17	FY 16	FY 15
$ 38	92	78	113	81

Building Debt Outstanding (in millions)

FY 19	FY 18	FY 17	FY 16	FY 15
$ 46	55	64	71	78

Richard Melnick, MBA 1992
Chief Financial Officer
01 OCT 2019