From the Chief Financial Officer

After a year and a half of disruption caused by the global pandemic, fiscal 2022 was a year of renewal and growth for Harvard Business School. We set a bold intellectual agenda, delivered on ambitious goals to strengthen the community, and charted an aspirational course for the future, demonstrating the resilience of the School’s faculty, staff, and students and the strength of the HBS economic model.

Total revenues increased to a record level in fiscal 2022, exceeding our forecast and outpacing the growth in expenses. As a result, our net operating surplus more than doubled, enabling us to invest in the School’s emerging strategic priorities while maintaining a healthy unrestricted reserves balance to spur new initiatives.

In view of the School’s accomplishments this past year, it’s fair to say that the pandemic has taught us important lessons. Financially and operationally, the pandemic strengthened HBS as an institution. We developed and integrated new technology into the classroom, expanded our research initiatives, and created new muscles in the area of virtual and blended teaching and learning.

The HBS Economic Model

What distinguishes the HBS economic model is a commitment to research that is largely internally funded. At the heart of this research is the School’s faculty, scholars who are passionate about advancing knowledge, shaping the practice of management, and inspiring passion in their students. Our faculty members stay close to practice, interacting in the field with leaders and managers who are confronting the day’s most pressing business challenges.

They apply knowledge gained in the field to generate intellectual capital, including case studies, books, articles, and online content to educate leaders and influence the managers on a global scale. Completing the self-sustaining cycle, income earned through key revenue streams—Executive Education, Harvard Business Publishing (HBP), and Harvard Business School Online—supplements revenues from MBA tuition and alumni gifts as key sources of funding for faculty research. These programs help provide the financial resources that enable the School to deliver on its mission of educating leaders who make a difference in the world.

Over the history of HBS, we have aspired to serve as a living model of a well-run organization, one that applies the skills, tools, and frameworks taught across the School’s programs. Transparency is a cornerstone of this goal. Toward this end, I invite you to review our financial results in detail in the Supplemental Financial Information section of this Annual Report.

The balance of this letter discusses our fiscal 2022 results in the context of our economic model, concluding with the financial forecast for fiscal 2023 and some thoughts on the longer-term strategic outlook.

Fiscal 2022 Review

Total revenues grew 20 percent year over year to a record $966 million, driven primarily by Executive Education, HBP, and MBA tuition and fees.

After a challenging fiscal 2021 in which Executive Education was forced to halt operations and then rapidly transition to all-virtual programing because of the pandemic, the group returned to largely on campus programming in fiscal 2022. Revenues increased 115 percent year over year to $174 million, exceeding our forecast. Equally significant was the group’s ability to integrate the knowledge gained during the pandemic, complementing 116 residential programs with 52 fully virtual programs. The rebound in Executive Education revenue is even more impressive considering that the group’s on-campus programming was paused for a significant portion of the winter to prevent an increase in COVID-19 cases associated with the Omicron variant.

Turning to HBP, revenues increased to $302 million, the highest in the group’s 28-year history and more than 10 percent higher than the prior year. The group leaned into its mission to improve the practice of management and its impact in a changing world, introducing new content, products, and capabilities. Circulation for Harvard Business Review, the group’s flagship publication, grew to a record 352,000 readers in fiscal 2022, reflecting the strong demand for high-quality digital and print content that gives managers and executives the tools to enhance both personal and organizational competitiveness.

HBS Online revenues declined $2 million to $74 million in fiscal 2022 from $76 million in the prior year, primarily reflecting higher customer acquisition costs amid increased competition in the educational technology market. Total enrollment grew to 40,667 participants, 5 percent higher than the prior year. Although down slightly on a year-over-year basis, HBS Online’s fiscal 2022 revenue was 72 percent higher than that of fiscal 2019, the most recent pre-COVID year.

The School’s annual endowment distribution for FY22 increased 4 percent to $191 million, or 20 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 HBS alumni community gave generously in fiscal 2022, with a combined $69 million in restricted and unrestricted current use giving, or 46 percent of total cash received from gifts. Unrestricted giving was particularly robust this past year, $45 million, 10 percent higher than fiscal 2021. These gifts represent the philanthropic cornerstone on which the School pursues new opportunities and advances the faculty’s pedagogical and research agenda. During the year, HBS welcomed back to campus more than 14,000 alumni for MBA and Executive Education reunions that had been postponed because of the pandemic.

MBA tuition and fees increased $24 million, or 21 percent for the fiscal year, to $137 million. The increase resulted primarily from the arrival of students who had elected the deferral and leave options implemented in fiscal 2021 in response to the pandemic. Total enrollment in the MBA increased to 1,870 students from 1,609 students in the prior year. Fiscal 2022 marked the return of the Field Immersion Experiences for Leadership Development (FIELD) course after a two-year absence. In addition, the MBA program graduated the first class of students from the MS/MBA Biotechnology: Life Sciences Program.

The School invested $43 million on capital spending in fiscal 2022, up from $22 million in the prior year. Campus renewal initiatives included the renovations of Cash House and Cumnock Hall, the addition and fit-out of new leased co-working office space at 114 Western Avenue, as well as smaller projects. To ensure that the HBS campus meets the needs of students, faculty, staff, and alumni over the next decade, the School launched a campus framework planning process. Designed to align future capital needs with the mission of HBS, the process will inform strategic planning for the faculty ecosystem, academic programs, residential campus, and digital transformation.

In addition to campus renewal and maintenance, this past year we continued to invest steadily in Information Technology, which remains integral to the School’s growth. IT operating spending increased 9 percent in fiscal 2022 to $98 million, accounting for 11 percent of total operating expenses. New investments included the build-out of additional hybrid classrooms and conference rooms. These and other infrastructure investments support the School’s adaptive approaches to teaching, learning, and working and prepare HBS for the evolving future of the workplace.

With the exponential growth of digitalization across the globe, the need for a seamless digital infrastructure at HBS has never been more clear. In that regard, a growing part of future budgets will involve digital transformation. Launched as a strategic priority by Dean Srikant Datar in fiscal 2022, digital transformation centers on exploring new ways to use data and information technology to extend the reach of the School’s research and teaching endeavors and to facilitate deeper connections throughout the HBS community.

Dean Datar also launched two new Institutes: the Digital, Data, and Design Institute at Harvard (D^3) and the Institute for Study of Business in Global Society (BiGS). The purpose of D^3 is to study how technological changes such as machine learning, digitalization, and artificial intelligence are affecting business and society. The goal of BiGS is to help harness business to address society’s greatest challenges, such as economic inequality, environmental destruction and racial injustice. In both areas, the faculty is creating foundational and applied research that is brought back to the classroom to guide students in their understanding of companies and other types of organizations.

Against this revenue and capital investment backdrop, we maintained our posture of prudent expense management and financial discipline in fiscal 2022. Operating expenses grew 17 percent to $908 million, to support the School’s higher revenues and the increased level of activity on campus.

While in any given year our largest expense—people—is always the same, the budget dynamics from one year to the next can be markedly different. In fiscal 2021, with the uncertainty around the scope and economic impact of the pandemic, the primary objective was to avoid layoffs and furloughs. The School scaled back on myriad expenses, curbed overtime, and froze pay rates for faculty and exempt staff. As a result, salaries and benefits increased just 3 percent from FY20 to FY21. In fiscal 2022, with the world having returned to a greater semblance of normalcy, the emphasis shifted to ensuring a smooth re-entry for students back to campus, and attracting and retaining our faculty and staff.

Salaries and benefits totaled $428 million, or 47 percent of total operating expenses, up 11 percent from the prior year. The difference reflects an increase in full-time equivalent (FTE) faculty and staff coupled with performance-related rate increases and the growth in Executive Education payments. Consistent with the School’s effort to grow the faculty, and by extension broaden its research base, faculty FTEs grew to 272 this past year, 6 percent higher than fiscal 2021.

Increased enrollment in fiscal 2022 drove a 14 percent increase in space and occupancy expenses, which rose to $73 million from $64 million in the prior year. As a percentage of total operating expenses, space and occupancy was flat at 8 percent versus fiscal 2021.

Buoyed by the increase in revenue, the School’s operating surplus increased 123 percent to $58 million.

Fiscal 2023 Outlook

As I begin my 20th year as chief financial officer of HBS, I have never been more excited about the opportunities we have to fundamentally influence the future of business leadership at a global level through our renewed academic programs, digital transformation, and new Institutes.

We have prioritized our commitment to diversity, equity, and inclusion (DEI) initiatives across HBS as we continue to develop the infrastructure of the School’s recently formed Office of Diversity, Equity, and Inclusion (ODEI) and develop a School-wide DEI strategy.  One of the initial priorities includes increasing our supplier diversity through the expansion of our partnerships with Black- and minority-owned services providers. We look to further our DEI progress through community engagement, learning and development opportunities, and recruitment and retention plans.

Fiscal 2023 will be a year of significant investment in the new digital transformation effort, as the School begins to develop a holistic approach to collecting and managing data across the HBS enterprise. Over time, capital will be invested in talent and tools to advance the transformation. Plans include launching Centers of Excellence to cultivate expertise in areas such as digital marketing and social outreach, and community and lifelong learning, as well as creating a digital incubator to provide resources for the exploration of new ideas.

With that as background, let me provide a brief look at our near-term financial expectations. On the top line, we are forecasting total revenue growth of 9 percent year over year in fiscal 2023. Combined revenue from HBP, Executive Education, and HBS Online are expected to grow about 10 percent from the prior year, as these groups continue to focus on leveraging new technologies and platforms to expand their reach. With enrollment increasing to nearly 2,000 students in fiscal 2023, MBA tuition and fees are expected to grow about 12 percent.

The ongoing support of HBS alumni will remain vital in fiscal 2023 and beyond. Restricted and unrestricted current use gifts are critical to the School’s ability to propel innovative strategic priorities, ensure we can provide need-based financial aid to talented students, and support the faculty’s innovative research.

The HBS endowment distribution is budgeted to increase 9 percent in fiscal 2023, which represents the Corporation’s 4.5 percent approved increase, plus distributions on new gifts.

Looking at expenses, our fiscal 2023 operating plan assumes an increase of approximately 11 percent in total operating expenses, about 46 percent of which relates to compensation for faculty and administrative staff. Factoring in salary increases, benefit costs, and anticipated vacancies, total compensation expense is expected to increase from fiscal 2022. Collectively, the School’s other line items are expected to increase 12 percent, primarily related to investments to grow Executive Education, HBP, and HBS Online.

The School’s capital budget for fiscal 2023 is $39 million, 9 percent less than the $43 million invested in fiscal 2022. In addition to ongoing work at 114 Western Avenue and Cumnock Hall, this budget includes investments to complete the campus framework plan, create start-up space for D^3 in Cotting House, and upgrade several Executive Education hybrid classrooms.

In summary, we begin fiscal 2023 positioned to deliver on the HBS mission by continuing to provide robust support for innovative teaching and research. Across the School’s core programs and activities, the resilience and growth we demonstrated this year underlines the value of our contribution to a connected world. As always, we remain committed to being good stewards of the School’s resources.

Richard P. Melnick, MBA 1992
Chief Financial Officer
01 NOV 2022