Expenses

Executive Education, Publishing, and Online operating costs, as well as the School’s faculty research costs, cut across multiple expense line items in the Statement of Activity and Cash Flow on page 22.

Faculty research expenses include a portion of faculty salaries and benefits expense, as well as direct costs for faculty support staff and travel, and for the School’s network of global offices. Additionally, HBS allocates a portion of the costs associated with library resources, campus facilities, technology, and administration to this category. Faculty research expenses totaled $152 million in fiscal 2019, comprising nearly 19 percent of the School’s operating budget.

Although HBS characterizes costs charged to Executive Education, Publishing, and Online as operating expenses, in a profit-seeking enterprise they would in large part be considered as cost of goods sold. These expenses include direct costs for staff compensation, specialized outside professional services in information technology and other functional areas, marketing costs, and residence expenses for executive program participants.

The School’s total operating expenses for fiscal 2019 were $821 million, up by $55 million, or 7 percent, from $766 million for fiscal 2018. This increase is attributable to several factors. A University-wide accounting change and higher costs in Online increased other expenses. Growth in the size of the School’s faculty and staff, as well as higher compensation costs, resulted in a higher salaries and benefits expense. Depreciation expense was up substantially, reflecting the opening of Klarman Hall. Increases in professional services and printing and publishing expenses were primarily attributable to growth-focused initiatives at Publishing and Online.

Salaries & Benefits

Compensation for faculty and administrative staff is the largest expense at HBS. The School’s salaries and benefits expense for fiscal 2019 increased 5.6 percent to $359 million, from $340 million in fiscal 2018. As in the prior year, this represented 44 percent of the School’s total operating costs.

Building the HBS faculty is a key strategic priority for the School. The total number of faculty, as measured in FTEs, can rise or fall in any given year, reflecting retirements, departures, and fluctuations in recruiting activity. Fiscal 2019 was a successful year for faculty recruiting and promotions. Fourteen candidates accepted assistant professor positions. Ten faculty members received promotions to associate or tenured positions. Net of retirements and departures, the size of the HBS faculty increased to 233 FTEs in fiscal 2019, from 225 FTEs a year earlier.

Recruiting administrative staff talent to fill open positions at HBS is becoming more challenging as the employment market tightens. The School’s staff grew to a budgeted 1,761 FTEs in fiscal 2019, from 1,721 in the prior year. In addition to those aimed at capitalizing on growth opportunities in Publishing and Online, significant staff increases were seen in the Information Technology and External Relations groups, as well as in support of the Harvard i-lab and Global Initiative.

Fellowships

The School categorizes fellowships, or financial aid, as an expense line item on the Statement of Activity and Cash Flows. Making education at HBS affordable to a broad cross section of applicants, regardless of their financial circumstances, is a longstanding goal of the School.

The prospect of entering or returning to the work force with high levels of education debt can deter strong MBA candidates from applying to HBS and restrict their career choices upon graduation. This is particularly true for younger students, women, those from outside the United States, and students whose early career paths have not enabled them to reduce their undergraduate loans.

Consequently, the School strives to assist students in minimizing their debt at graduation by ensuring that fellowship support keeps pace with tuition and fees. Extending a long-term record of annual increases in financial aid, total Fellowships expense for fiscal 2019, including assistance for MBA students, Doctoral candidates, and a limited number of Executive Education participants, increased by $1 million, or 2 percent, from fiscal 2018 to $51 million. Fellowships amounted to 6 percent of the School’s total operating costs in fiscal 2019, compared with 7 percent a year earlier.

Approximately half of the School’s MBA students currently receive fellowships, which cover an average of more than 50 percent of a student’s total tuition. About 27 percent of total tuition—nearly $38 million—was awarded as fellowships in fiscal 2019. This includes fellowships to more than 170 students in the classes of 2020 and 2021 who were the first in their families to attend college and now graduate school.

Average fellowship support per student increased 8 percent in fiscal 2019 to $42,000, from $38,959 in the prior year. Over the past five fiscal years, the School’s average two-year MBA fellowship award has grown from $64,836 for the Class of 2015 to $80,400 for the Class of 2020.

Funding for fellowships comes from restricted endowment and current-use giving by HBS alumni and friends. These funds are supplemented by unrestricted funds as necessary, which totaled $4 million in fiscal 2019.

Publishing & Printing

This expense category includes a portion of Publishing’s production costs plus a small amount of spending related to the School’s printed materials and publications. The production costs include, for example, Harvard Business Review’s printing expense, which increased in fiscal 2019 as circulation continued to grow. These costs also include strategic investments in digital infrastructure and content designed to extend the group’s record of consistent growth at a time of significant change in the way people consume information.

The School’s publishing and printing expenses for fiscal 2019 increased by $3 million, or 4 percent, from the prior year, to $77 million. This amounted to 9 percent of the School’s total operating costs, compared with 10 percent in fiscal 2018.

Space & Occupancy

The HBS campus includes 36 buildings encompassing more than 1.9 million square feet of occupied space. Space and occupancy expense includes costs related to maintaining and operating the School’s buildings and campus infrastructure. Additionally, facilities improvement and renovation costs that do not qualify as capital expenses are generally categorized as space and occupancy.

Also included in this category are expenses related to dining facilities and other campus services, and costs associated with leased space for Publishing, Online, and the School’s global offices. In addition, residence costs for Executive Education program participants are reported as space and occupancy expenses.

The School’s space and occupancy expenses for fiscal 2019 grew by $1 million, or 1.4 percent, from the prior year to $72 million. Increases in dining and student housing costs and spending on small facilities projects were partially offset by lower utilities and support services expenses. As in the prior year, space and occupancy expenses amounted to 9 percent of the School’s total operating costs.

Professional Services

A large portion of the School’s professional services expense is related to spending that a for-profit business would categorize as cost of goods sold—including growth-focused investments at Publishing and Online, as well as compensation for faculty who teach Executive Education programs.

For fiscal 2019, a University-wide accounting change shifted a portion of the School’s contingent labor costs to the Other Expenses category. As a result, professional services expenses for fiscal 2019 rose by a comparatively modest $4 million, or 6 percent, from the prior year to $72 million. As in fiscal 2018, professional services expenses amounted to 9 percent of total operating costs.

The increase in professional services expenses for fiscal 2019 primarily reflected costs for numerous projects designed to enhance the School’s information technology (IT) capabilities. The School’s IT infrastructure is becoming increasingly fundamental to operations. As a result, investments in IT have contributed to higher fixed costs at HBS in recent years. For fiscal 2019, the School’s total IT investment grew by $5 million, or 6 percent, from fiscal 2018 to $87 million.

In addition to implementing new MBA classroom video and student engagement platforms during the year, the School made substantial faculty research computing and research information system investments. The School launched a community-wide video and web conferencing service; continued to roll out a new VoIP telephone system; and strengthened cybersecurity technologies, protocols, and resources across the campus.

IT spending represented nearly 11 percent of the School’s total operating expenses in fiscal 2019. Consequently, controlling IT costs is an important financial priority for the School. Initiatives currently underway include shifting toward reliance on software as a service platforms and away from custom applications developed at the School, greater use of third-party IT service providers, and moving IT applications to the cloud.

Supplies & Equipment and Other Expenses

Supplies and equipment expenses for fiscal 2019 increased by $1 million, or 8 percent, from the prior year to $13 million, or 2 percent of the School’s total operating costs. In the Other Expenses category, fiscal 2019 spending rose by $20 million, or more than 24 percent, from fiscal 2018 to $102 million. This amounted to 12 percent of the School’s total operating costs, compared with 11 percent a year earlier.

Approximately $15 million of the increase in other expenses related to two types of outlays. First, costs for a wide range of contingent labor providers, formerly categorized by the School as professional services expenses, shifted to other expenses. Second, other expenses for fiscal 2019 reflected increased payments to an outside technology platform vendor at Online.

These payments were up substantially from fiscal 2018, reflecting both an accounting change and expansion in the group’s portfolio of course offerings. Approximately $5 million of the fiscal 2019 growth in other expenses reflected increased spending in several areas, including advertising by Online and campus-wide catering costs and royalty fees.

Debt Service

HBS finances major capital projects with a mix of three sources of funding. The most important sources are gifts and unrestricted reserves of internally generated cash. The School may also make strategic use of debt financed through the University as appropriate.

The HBS balance sheet historically has been only modestly leveraged, and debt leverage remained low in fiscal 2019. Klarman Hall—the School’s most recent large construction project—was substantially completed in fiscal 2018. As a result, total capital expenses for fiscal 2019 decreased to $38 million in fiscal 2019, from $92 million in the prior year. As in fiscal 2018, these investments were primarily funded by internally generated cash, and there were no new borrowings. HBS paid down $9 million in building debt in fiscal 2019, compared with $8 million a year earlier.

As a result, the School’s year-end fiscal 2019 building debt-to-asset ratio decreased to 0.9 percent, from 1.1 percent in the prior year. Other university debt—mainly consisting of repayment obligations to the University for mortgage loans made by HBS as a faculty recruiting incentive—increased by $4 million from fiscal 2018 to $31 million.

The School’s debt service expense consists of interest payments to the University, and is covered by using cash from operations. Fiscal 2019 debt service expense was $3 million, flat with the prior year. As in fiscal 2018, this expense was mainly associated with borrowings to finance prior years’ campus expansion. Consistent with the three prior years, the interest portion of the School’s debt service amounted to less than 1 percent of total operating costs in fiscal 2019.

University Assessments

The University assessments expense encompasses services provided to HBS by Harvard University, including payroll and benefits administration, processing of accounts receivable and payable, and legal services. The amount charged to HBS in any given year is primarily calculated as a percentage of the School’s total expenses. As expected, the School’s expense in fiscal 2019 for these assessments increased by $2 million from the prior year to $26 million, amounting to 3 percent of total operating costs.

Depreciation

The School computes depreciation using the straight-line method over the estimated useful lives of the assets. Depreciation expense for fiscal 2019 increased by $4 million, or 9.5 percent, from the prior year to $46 million. This increase primarily reflected the School’s larger asset base following the opening of Klarman Hall. The School’s depreciation expense for fiscal 2019 amounted to 6 percent of total operating costs, compared with 5 percent a year earlier.

Cash Before Capital Activities

The School’s cash from operations increased in fiscal 2019 by $14 million from the prior year to $104 million. As in fiscal 2018, this cash was largely generated by margin contributions from the School’s competitive business units—Executive Education, Publishing and Online—as well as generous giving to the School by alumni and friends of HBS. In addition, depreciation is a non-cash item that added back $46 million to the School’s cash flow in fiscal 2019, compared with $42 million in the prior year.

Net Capital Expenses

Following the completion of Klarman Hall in fiscal 2018, the School’s total capital investment decreased to $38 million in fiscal 2019, from $92 million in the prior year. Fiscal 2019 capital activity focused on multiple small projects designed to prevent deferred maintenance, reduce the School’s environmental footprint, enhance sustainability, and preserve the value of the HBS campus for future generations. In addition to ongoing facilities renewal and maintenance, these projects included IT infrastructure and digital technology upgrades, as well as energy efficiency measures across the campus to meet the University’s greenhouse gas reduction goals.

The School’s net capital expenses for fiscal 2019 decreased to $35 million, from $79 million a year earlier, largely funded as in the prior year with internally generated cash. In addition to lower capital spending, the decrease reflected the timing of the receipt of cash gifts for capital projects, partially offset by planned increases in capital project pre-funding.

Changes in Debt & Other

The School’s debt and other cash activities decreased by $104 million in fiscal 2019, compared with a decrease of $80 million in the prior year. The fiscal 2019 decrease primarily reflected a transfer of $100 million in unrestricted cash to the HBS endowment, made possible by the School’s strong operating surplus. HBS made a comparable $65 million cash transfer to the endowment in fiscal 2018.

Because gifts, internally generated cash, and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2019 marked the School’s eleventh consecutive year with no new borrowings. Debt principal payments increased by $1 million from the prior year to $9 million.

Capitalization of endowment income—or cash used to purchase endowment units—was a $2 million use of cash in fiscal 2019, flat with the prior year. In compliance with federal and state legal requirements, the School’s objective is to spend as much of the endowment distribution as possible in any given year, according to the terms of each gift. Funds unspent as a result of gift restrictions are generally reinvested in the endowment.

In compliance with the law, HBS accesses the investment appreciation within existing endowment accounts when the terms of the gift require funds to be withdrawn at a rate higher than the University’s payout rate in any given year. Decapitalization of endowment income—or cash drawn from endowment appreciation—was a source of $2 million in cash in fiscal 2019, compared with $3 million for the prior year.

Ending Balance, Unrestricted Reserves

Nearly 57 percent of the School’s revenues come from Executive Education, Publishing, and Online—business units that are highly sensitive to the economy. Consequently, maintaining an ample balance of unrestricted reserves outside of the endowment is crucial in providing HBS with sufficient liquidity to finance ongoing campus renewal and expansion projects, and to capitalize on emerging strategic opportunities through economic cycles over the long term.

Driven by the School’s continued healthy cash from operations, fiscal 2019 was a successful year in this regard. After the $100 million of unrestricted, internally generated cash transferred to the endowment, HBS concluded fiscal 2019 with an unrestricted current-use reserves balance of $129 million, compared with $118 million a year earlier. This level is substantially above the $100 million in unrestricted reserves established by HBS as the School’s long-term liquidity management target.

* In pursuit of greater comparability across the Harvard schools, the University has asked all the schools to report their net results in accordance with generally accepted accounting principles (GAAP) in the United States. In addition to results for fiscal 2019, the School’s results for fiscal years 2017 and 2018 are presented in accordance with GAAP within the Statement of Activity and Cash Flows.