Our fiscal 2020 financial performance tells a story with two distinct chapters: July 2019 through mid-March 2020, when HBS enjoyed strong results and advanced its core educational and research mission—as it had for many years before. And then mid-March through the end of June, when the School had to balance those priorities with the rapidly evolving dynamics and financial pressures of COVID-19.

Almost overnight, the pandemic disrupted traditional in-person learning and created the need to operate in new and sometimes unfamiliar ways.

Academically, HBS adapted quickly. The School’s leadership prioritized protecting the health, safety, and well-being of the HBS community. Once Harvard announced it would move classes online for the final weeks of the semester, more than 100 faculty members received intensive training, enabling the MBA and Doctoral Programs to resume virtually after spring break ended.

Additionally, HBS faculty members mobilized to generate timely new research exploring how organizations were managing through a dramatic confluence of events—a global health crisis, worldwide economic stress, and heightened demand for environmental and social change—to transition employees to remote work, attract new customers, and spur innovation. The faculty produced nearly 700 cases and course development materials in fiscal 2020, along with more than 400 books, articles, and working papers.

Careful planning helped mitigate the financial impact of COVID-19 on the School. In the months leading up to fiscal 2020, and long before the coronavirus was on the horizon, a team of HBS faculty and staff met to discuss what steps might be required in the event of an economic slowdown. With lessons learned from how HBS responded to the Great Recession, they developed a playbook that included not only strategies for containing costs but also opportunities for new growth. The team was guided by the desire to ensure that, in the face of a recession, the School’s educational programs and faculty research would remain strong. This work, combined with multiyear financial planning, frequent reforecasting, and regular updates on key metrics, built a shared understanding of the School’s financial status and community readiness to act when needed.

Fellowships (in millions)

Fiscal Year	MBA	Total*
FY 20	$40	$57
FY 19	38	51
FY 18	37	50
FY 17	36	48
FY 16	34	47

^*Includes Doctoral Programs and Executive Education

Investment in Research (in millions)

FY 20	FY 19	FY 18	FY 17	FY 16
$ 131	152	144	136	131

Fiscal 2020 Financial Summary

Total revenues in fiscal 2020 were $861 million, down 7 percent from the prior year. The decline primarily reflected the decision to pause the delivery of Executive Education programs from mid-March through the end of June as a result of COVID-19. Total expenses increased 1 percent to $831 million, resulting in a net margin contribution of 3.5 percent, compared with 11.2 percent in fiscal 2019. Cash from operations—the School’s operating surplus—came in at $30 million versus $104 million in fiscal 2019.

The ability to generate a surplus—despite the unprecedented events late in the fiscal year—speaks to the diversity of our revenue streams, our conservative operating philosophy, and the versatility of our economic model. With the duration and extent of COVID-19 still uncertain, each of these elements will be essential as the School continues to adapt to the challenges of the year ahead.

The HBS Economic Model

HBS is an institution built on participant-centered learning. At the center of this equation is the School’s faculty, more than 250 individuals who are passionate about applying their research to shape the practice of management and educate and inspire new generations of leaders. Our faculty members thrive on engaging directly with managers, entrepreneurs, and C-level executives to learn what makes various businesses succeed or fail.

Knowledge gained by the faculty in the field is core to the learning experience, as it generates new research, including course materials. It also drives the School’s economic model. Programs and products offered through Executive Education, Harvard Business Publishing (HBP), and Harvard Business School Online (HBSO) leverage the intellectual capital created by the faculty—including case studies, seminars, books, articles, and online content—to educate leaders and influence the practice of management on a global scale.

What distinguishes the HBS economic model among Harvard University’s 11 graduate and professional schools is that faculty research is largely self-funded. The earned income generated by Executive Education, HBP, and HBSO, supplemented by revenues from MBA tuition and alumni gifts, provide a virtuous circle of research funding that enables the School to execute on its mission over the long term.

In the four years prior to fiscal 2020, a strong cash position enabled HBS to invest in its endowment reserve. Unlike alumni gifts to the endowment, which are restricted mainly to perpetual activities such as the granting of fellowships and professorships, income from the internally generated funds invested in the endowment is unrestricted.

Given the economic uncertainty and market volatility, we elected to hold our fiscal 2020 operating surplus in cash, rather than transfer any portion of the surplus to the endowment reserve. As a result, HBS ended the fiscal year with $174 million in unrestricted reserves held outside of the endowment. This compares with $129 million in unrestricted reserves in fiscal 2019.

HBS strives to be a well-run organization that embodies the practical skills, tools, and frameworks taught across the School’s academic programs. Transparency is essential to achieving this goal, which is why our Annual Report includes a detailed Supplemental Financial Information section beginning on page 26. The balance of this letter discusses the School’s fiscal 2020 financial performance at a strategic level, as well as our financial forecast for fiscal 2021.

Fiscal 2020 Review

After a record year in fiscal 2019, total revenue declined $64 million in fiscal 2020. The shortfall resulting from the pause in Executive Education programming after the pandemic was partly offset by increased revenue from HBSO, which continues to scale rapidly. Revenue from HBP remained flat with the prior year.

For HBP, fiscal 2020 reflected the first full year of revenue from a new tiered subscription strategy that drove global subscribership across the group’s flagship publication, Harvard Business Review. Advertising revenue also grew year over year, as did the HBR Analytics Service. This new offering is tapping into the demand for unbiased market research on key business trends and opportunities.

HBSO posted a double-digit revenue increase from the prior year. The group expanded its portfolio of courses, reaching more than 29,000 participants in fiscal 2020 and generating positive cash from operations and an operating surplus for the second consecutive year. To help college students become fluent in the language of business and finance, the group offered its Credential of Readiness (CORe) program at a significant discount to those who had lost jobs or internship opportunities as a result of the pandemic.

Prior to the pandemic, Executive Education launched several new programs, covering topics such as workforce transformation, fintech innovation, and succeeding as a strategic CFO. The group also initiated the delivery of three cohorts of its global Senior Executive Program in India, China, and the Middle East. Beginning in mid-March, Executive Education moved to an entirely virtual model, leveraging two new virtual Live Online Classrooms (LOCs) built in Cumnock Hall.

Publishing Revenue (in millions)

FY 20	FY 19	FY 18	FY 17	FY 16
$ 262	262	240	221	217

Executive Education Revenue (in millions)

FY 20	FY 19	FY 18	FY 17	FY 16
$ 146	222	207	191	176

The School’s annual endowment distribution for fiscal 2020 increased 7 percent from the prior year to $173 million, amounting to 20 percent of total revenues. The HBS endowment 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 in accordance with the donors’ intentions and the terms of each gift.

Revenue from current use gifts declined 12 percent in fiscal 2020 to $60 million, from $68 million in the prior year. As this was the second year following the conclusion of the HBS Capital Campaign, we anticipated a decrease in the overall level of current use giving. Restricted and unrestricted current use gifts will continue to play an important role in innovation funding for HBS. This income enables the School to immediately capitalize on emerging opportunities that advance the faculty’s pedagogical mission and research agenda.

As we expected, HBS benefited from nearly 7 percent growth in endowment distribution income in fiscal 2020. This growth reflected the University’s distribution rate and the size of the endowment, including new gifts from alumni as well as transfers from the School to the endowment reserve. While the endowment is a key financial asset and the School’s largest source of savings, our economic model has enabled us to be less reliant on endowment income than the University’s other schools.

MBA tuition and fees declined 3 percent, or $4 million, for the fiscal year to $136 million. Much of the decrease is directly attributable to COVID-19, which prompted the cancellation of the FIELD Global Immersion, a required semester-long course that culminates in travel to a global partner company; all students received refunds. As part of the transition to concluding the spring semester in a remote learning mode, the School provided funds to cover technology purchases, printing, and other costs associated with participation in online classes for all students.

As summer approached, and the prolonged nature of COVID- 19 became clear, the School also stepped in to help MBA students navigate a challenging job market. As the economic crisis worsened, internships and other summer employment opportunities rapidly began to shrink. HBS significantly expanded the funding for its long-standing Summer Fellows Program, which supplements salaries for students taking positions in entrepreneurial organizations, social enterprises, and other non-traditional sectors.

HBS is continuing to innovate across the MBA Program, offering unique opportunities that position students at the intersection of science, technology and management. In fiscal 2020, the School enrolled its first group of students in the new MS/MBA Biotechnology program and graduated the first cohort in a similar joint degree program in engineering.

The School bears the majority of the operational and staff expenses required to support these joint degree programs and shares a portion of the MBA tuition with the partnering Harvard schools. We are fortunate to have generous support from HBS alumni, whose endowment gifts have helped to offset the financial impact to the School.

The Doctoral Programs moved classes online at the same time as the MBA Program. The impact of COVID-19 was small in fiscal 2020, because offers of admission to new doctoral students and job placement for graduating doctoral students were largely completed. Year-to-year metrics are therefore consistent.

After many years of extensive capital activity on campus, including the construction of several new buildings, in fiscal 2019 HBS shifted its focus to renewal and maintenance projects. Fiscal 2020 capital expenses increased to $43 million from $38 million in the prior year. The most significant project was the build-out of the two HBS Live Online Classrooms.

IT Investment (in millions; excludes capital expenses)

FY 20	FY 19	FY 18	FY 17	FY 16
$ 96	87	82	85	85

Capital Investment (in millions)

FY 20	FY 19	FY 18	FY 17	FY 16
$ 43	38	92	78	113

Fiscal 2021 Outlook

HBS is a community built on the diverse perspectives, backgrounds, and experiences of its faculty, students, and staff. As fiscal 2020 ended, the death of George Floyd, coming after similar killings of countless other Black Americans, spurred global protests for racial justice. On the School’s campus, Dean Nitin Nohria formed an Anti-Racism Task Force composed of faculty, staff, students, and alumni to develop ideas for how the HBS might advance racial equity.

In September 2020, that effort led to the release of the School’s Action Plan for Racial Equity. It sets out concrete steps to attract additional Black talent across the entire HBS community, develop research and course material designed to advance racial equality in business, and influence the broader business community to promote racial equity, among other initiatives. The School has committed $25 million over a 10-year period to support this effort and will seek further support from donors to sustain the plan over time.

In light of the widespread crises that have gripped America and the world over the past year—racial inequality, the pandemic, and global economic instability—the MBA Program has strengthened its commitment to a diverse and engaged HBS community. To ensure that applicants have the appropriate resources to succeed at the School, the MBA Program plans to increase its financial aid resources, launch a new one-year COVID-19 Hardship Fund, and introduce a new Childcare Scholarship Fund.

HBS has long been conservative in its approach to budgeting revenue and expenses, and that philosophy is especially true as we look ahead to the remainder of the current fiscal year. The School’s fiscal 2021 budget assumes that total revenues will decline approximately 12 percent from the $861 million reported for fiscal 2020. Combined revenue from HBP, Executive Education, and HBSO is expected to decrease by a similar percentage. Given the sharp decrease in revenue, the School expects to incur a significant operating deficit for the fiscal year.

Restricted and unrestricted current use gifts, which accounted for 7 percent of our total revenues in fiscal 2020, will remain integral to the School’s financial health this year. The School’s ability to innovate in its curricula, support the faculty’s ambitious research, and invest in digital transformation depends on the HBS community’s continued support.

We expect HBS to benefit from mid–single digit growth in the endowment distribution for fiscal 2021.

Moving down the income statement to operating expenses, our fiscal 2021 financial plan anticipates a 1 percent decline in the School’s total spending compared with fiscal 2020. A projected increase in professional services is expected to be largely offset by declines in other areas.

The School’s total capital budget for fiscal 2021 is $21 million, much of which already has been allocated to physical plant upgrades to enable hybrid classes, where some students are in-person and others participate remotely.

HBS operates at a scale unique among leading business schools. In an average year, the first- and second-year MBA classes comprise about 1,800 students in total. In fiscal 2019, more than 12,000 individuals participated in an Executive Education program.

In the short term, the pandemic will make operating at capacity difficult. In the spring, MBA Program leadership allowed all students the choice of deferring or taking a leave of absence, and a number of students took this path. As a result, revenue from MBA tuition and fees is projected to decline in fiscal 2021. Similarly, in Executive Education, pivoting to a virtual format and developing strategies to leverage online platforms for customized offerings will take time. Revenue from Executive Education, then, also is expected to decline in fiscal 2021.

The School will need to invest significantly in diagnostic testing the build out of hybrid classrooms, improving building HVAC systems, signage and other measures to keep the School community safe as the campus continues to reopen. The total investment is estimated at $25 million.

The School has sufficient capital, in the form of unrestricted reserves held inside and outside of the endowment, to make the necessary investments over the short and long term. During periods of global economic turbulence, these reserves serve as a rainy-day fund that can help the School navigate through a revenue shortfall or operating deficit. At the same time, we continue to be focused on the School’s core mission. This requires us to be good stewards of our capital. In that sense, the School’s reserves are a multi-generational asset that can be invested in the future priorities of the School in the decades ahead.

In summary, while the School’s long-term financial health remains strong, we are not depending entirely on our reserves to help navigate HBS through the near-term challenges caused by COVID-19. Instead, the School will remain nimble. We will continue to focus on delivering the highest quality educational programs and research, while making the prudent decisions necessary to return to breakeven as soon as possible and generate consistent financial results in the years ahead.

Building Debt Outstanding (in millions)

FY 20	FY 19	FY 18	FY 17	FY 16
$ 40	46	55	64	71

Harvard Endowment Returns

FY 20	FY 19	FY 18	FY 17	FY 16	FY 15	FY 14	FY 13	FY 12	FY 11
7.3%	6.5	10.0	8.1	-2.0	5.8	15.4	11.3	-0.1	21.4

Richard Melnick, MBA 1992
Chief Financial Officer
01 OCT 2020