From the CFO

In fiscal 2021, Harvard Business School navigated the operational and financial challenges of the global pandemic by staying true to its guiding principles: The School prioritized the health and well-being of its faculty, staff, and students as it leaned into its mission of educating leaders who make a difference in the world.

Faced with the most significant disruption to the MBA Program since World War II, the School's leadership—including outgoing Dean Nitin Nohria and incoming Dean Srikant M. Datar—implemented a clear strategy: Maintain the quality of the educational experience by investing in hybrid and virtual classroom technologies; protect jobs by reducing noncritical expenses and holding salaries level; and lay the groundwork for important initiatives in a new, post-COVID world.

At the outset of the fiscal year, the School confronted two major financial hurdles. First, roughly 20 percent of admitted MBA students accepted the School's offer to defer their admission, and another 15 percent of existing students took a leave of absence, which meant the loss of tens of millions of dollars in tuition revenue for fiscal 2021. Second, the pandemic forced Executive Education to pivot from its entirely in-person learning model to an all-virtual portfolio. Designing and implementing such a portfolio from the ground up takes time. Given the complexity and time constraints of the task, the initial revenue projection for virtual Executive Education programming in fiscal 2021 was penciled in at what seemed like a realistic expectation: $0.

But with the entire School community coming together, HBS adapted. Driven by better-than-expected results in Harvard Business Publishing (HBP) and Harvard Business School Online and the support of HBS alumni, the School delivered financial results that came in significantly ahead of expectations. In a year when HBS had budgeted an operating deficit, the School instead generated an operating surplus of $26 million in fiscal 2021.

The HBS Economic Model

The resilience of the School's economic model was tested during fiscal 2021 and proved sound. The HBS model is unique among Harvard University's 12 graduate and professional schools. At its core is a commitment to internally funded faculty research. Earned income from Executive Education, HBP, and HBS Online, augmented by revenue from MBA tuition and alumni gifts, generates a value-sustaining circle of funding. These financial resources enable the School to execute on its strategic priorities, regardless of the economic environment.

HBS research budgets provide the School's faculty the freedom to pursue the questions that interest them most and stay close to practice, generating insights that can help address the most pressing issues confronting businesses, organizations, and society. The faculty then bring the learnings from these interactions back into the classroom. By informing their teaching in all the School's educational programs, their knowledge educates the next generation of leaders and influences the practice of management on a global scale.

As I write, the world continues to face uncertainty. Container ships bottleneck the world's ports; supply chains are unable to keep up with demand, and product shortages loom. Inflation is rising. Racial injustice and economic inequality persist. Businesses are adapting to the new dynamic of a remote workforce.

HBS faculty members researched these and other issues in fiscal 2021 and, despite the pandemic, produced significant output. The School's 256 full-time equivalent (FTE) faculty produced 668 cases and course development materials, as well as 491 books, articles, and working papers. Additionally, the School convened nearly 1,400 academics and practitioners across 10 research conferences and hosted a widely attended virtual faculty research symposium.

Innovation across the MBA Program continued in fiscal 2021, as the School delivered the first year of the new joint MS/MBA in Biotechnology: Life Sciences (a joint degree with the Graduate School of Arts and Sciences and Harvard Medical School through the Harvard Department of Stem Cell and Regenerative Biology). With so many organizations requiring leaders who possess a broad skillset and perspective, this and other joint degree programs provide students with invaluable, cross-disciplinary expertise that equips them to tackle diverse business challenges. Recognizing their importance, HBS covers a portion of the staff and operational expenses required to support them, and shares the MBA tuition with the partnering Harvard schools. We receive generous support from HBS alumni, whose gifts offset the expenses.

The Doctoral Program also made the successful transition to remote learning, delivering 30 courses virtually. All of the Program's graduates were fully employed at graduation, and the School developed a financial aid plan to support an additional year for those students whose job search was affected by the pandemic.

The balance of my letter reports on our fiscal 2021 financial results and our outlook for fiscal 2022. 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. Toward this end, the Supplemental Financial Information section will explore our results in more detail.

Fiscal 2021 Review

Total revenue decreased by approximately 7 percent from the prior year to $805 million, primarily reflecting lower revenue from MBA tuition and Executive Education, partly offset by top-line gains from HBP and HBS Online.

For HBP, fiscal 2021 revenue increased 5 percent, as the group advanced its goal of improving the practice of management and its impact in a changing world. In support of that mission, HBP developed content on timely and highly relevant issues such as advancing racial equity, teaching in hybrid and virtual environments, and the impact of the pandemic on the future of work.

The group's flagship publication, Harvard Business Review (HBR), continued to generate value from its tiered subscription strategy, launched in fiscal 2019. Reflecting the success of HBR's digital initiatives and the relevance of its content, the number of average monthly visitors to HBR.org has more than doubled over the past five years.

Looking ahead, HBP is focused on driving growth across its core editorial products, increasing its global scale, and building strategic partnerships that enhance the group's capabilities and broaden its reach. HBS Online revenue increased approximately 31 percent in fiscal 2021, significantly exceeding our forecast and generating an operating surplus for the third consecutive year. Through an expanded range of course offerings, HBS Online reached more than 40,000 participants in fiscal 2021. The group has topped 122,000 participants since it began seven years ago. The group began work on the Early College Business Initiative (ECBI), which seeks to inspire underrepresented minority college students to pursue management careers.

Although Executive Education revenue was down approximately 45 percent, fiscal 2021 was a strong year for the group. With all residential programs paused as a result of the pandemic, the group rapidly shifted gears to provide impactful programming in a virtual format.

Over the course of the year, Executive Education designed and delivered 70 virtual Comprehensive Leadership and Topic-Focused Programs for more than 4,400 participants around the world. Of the 13,101 individuals who participated in programs in fiscal 2021, 32 percent were women—a significant increase from past years. Reflecting the focus of sustaining an engaged learning environment, participants rated the quality of the virtual Executive Education experience as high.

Looking ahead, Executive Education plans to retain and enhance the best aspects of the virtual, blended, and on-campus experiences to drive sustainable growth across the portfolio.

The School's annual endowment distribution for FY21 increased approximately 6 percent to $184 million, or about 23 percent of total revenues. The increase reflected the University's distribution rate and the size of the endowment, which includes gifts from alumni and transfers from the School to the endowment reserve.

The 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 based on the intentions of the donors and the terms of individual gifts. While the endowment is the School's largest financial asset, HBS is among the least dependent on endowment income of the University's 12 degree-granting schools.

Revenue from current use gifts was ahead of forecast at $60 million in fiscal 2021, flat with the prior year. 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.

MBA tuition and fees declined $23 million, or approximately 17 percent for the fiscal year, to $113 million. The change was driven primarily by the flexible deferral and leave policy enacted in response to COVID-19. Total enrollment in the MBA Program decreased to 1,530 students from 1,847 students in the prior year. The occupancy rate of HBS dorms—90 to 95 percent in a typical year—was only 50 percent in FY21. For the second consecutive year, COVID-19 also caused the cancellation of the semester-long FIELD Global Immersion course, resulting in a refund to students.

As HBS leadership began planning for fiscal 2021, COVID-19 was at the front of the decision-making process. Given the ongoing uncertainty about the pandemic, all departments scrutinized their budgets, preserving only those critical, strategically important expenses that were feasible in light of COVID-related restrictions. People were the priority. To avoid layoffs or furloughs, the School scaled back on a range of expenses, reduced overtime, and kept pay rates for faculty and exempt staff flat for the fiscal year.

As a result of these initiatives, combined with the pandemic-related decrease in campus activity, total operating expenses for fiscal 2021 declined approximately 6 percent to $779 million from $831 million in the prior year.

Salaries and benefits, the largest component of operating expenses, increased approximately 3 percent to $386 million. With faculty and staff pay rates remaining flat in fiscal 2021, the variance primarily related to the roughly 5 percent growth in FTE faculty.

Space and occupancy expenses declined 10 percent to $64 million, reflecting the decrease in student enrollment and on-campus activity. What is not immediately evident in this line item is that the School invested several million dollars in pay continuation benefits, consistent with its long-standing commitment to the broader HBS community. These benefits ensured that hundreds of contingent and contract workers, including cafeteria staff and custodians, would continue to be paid even for periods they were not needed on campus.

Of note, for fiscal 2021, Harvard University granted a one-time waiver of a particular assessment the School pays annually to the University. During a period of financial uncertainty, the waiver allowed HBS to deploy more of its resources to support students and the School community.

Reflecting the decline in revenue, cash from operations—the School's operating surplus—declined approximately 13 percent to $26 million from $30 million in fiscal 2020.

Capital expenses declined approximately 49 percent to $22 million in fiscal 2021 from $43 million in the prior year. At the outset of the pandemic, the School made a conscious effort to reduce its capital spend for the year, focusing on mission-critical projects. These projects included initiating the design and renovation of Cash House and the renewal of McArthur Hall, and the build-out of hybrid classrooms. Funds allocated to the hybrid classrooms were part of a $15 million investment in testing and tracing, diagnostic and personal protective equipment, enhancements to HVAC systems, signage, and other measures designed to keep the School community safe.

Fiscal 2022 Outlook

Fiscal 2022 marks the first full year for Dean Srikant M. Datar, whose vision and experience have been central to setting our strategic course and priorities for the year ahead.

The School's fiscal 2022 budget assumes that total revenues will increase approximately 14 percent from the $805 million reported in fiscal 2021. Combined revenue from HBP, HBS Online, and Executive Education is expected to grow at a faster rate. With enrollment returning to approximately 1,800 FTE students in fiscal 2022, the budget forecasts MBA tuition and fees will grow in the low 20 percent range.

Restricted and unrestricted current use gifts, which represented approximately 7 percent of total revenues in fiscal 2021, remain vital to the School's health this coming fiscal year. The ongoing support of the HBS community is integral to the School's ability to advance its curricula, support the faculty's cutting-edge research, and invest in the projects that fuel strategic innovation.

We expect HBS to benefit from a 2 percent growth in the endowment distribution for fiscal 2022.

Moving down the income statement, operating expenses are expected to increase approximately 19 percent, due in part to the larger faculty and higher program-related expenses, including professional services. As a result, the School has budgeted a small operating deficit for the fiscal year.

The School's capital budget for fiscal 2022 is approximately $32 million, consisting primarily of building renovations and additional upgrades to the hybrid classrooms.

Regardless of the economic cycle, HBS continues to lean into its mission to educate leaders who make a difference in the world. As an institution built on participant-centered learning, we believe that our investment in people will continue to differentiate—and elevate—an HBS education. I want to thank the entire HBS community for their dedication and many sacrifices during an exceptionally challenging year. The technology through which education is delivered will no doubt continue to evolve. But the School's resource stewardship, outstanding faculty and staff, engaged students, and the sustained support from our alumni, position us for the opportunities ahead.

Richard P. Melnick, MBA 1992
Chief Financial Officer
01 NOV 2021