Expenses

The School’s total operating expenses for fiscal 2018 were $766 million, up by $35 million, or nearly 5 percent, from $731 million for fiscal 2017. The increase was primarily attributable to increased faculty research support, as well as spending aimed at positioning HBP, HBS Online, and Executive Education for future growth.

HBS faculty and staff worked together to offset these investments by continuing to operate in a lean manner, making tradeoffs when necessary to leverage maximum impact from available resources.

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

HBP and Executive Education continued to deliver solid operating leverage on sales growth in fiscal 2018. Despite increases in compensation and other variable costs as revenues grew, as well as significant growth-focused investments at HBP, each group contributed more earned income to the School’s fiscal 2018 operations than initially anticipated.

Faculty research expenses at HBS—nearly 19 percent of the operating budget—cut across several line items in the Statement of Activity and Cash Flows. The cost of faculty research includes a portion of faculty salary and benefits expense. Research expense also includes direct costs for faculty support staff and travel, and for the School’s network of global research centers.

Additionally, HBS allocates a portion of the costs associated with library resources, campus facilities, technology, and administration to this expense category. The School’s total spending for faculty research support in fiscal 2018 increased by $8 million, or nearly 6 percent, from the prior year to $144 million.

Salaries & Benefits

Compensation for the faculty and administrative staff is the largest expense at HBS. The School’s salaries and benefits expense for fiscal 2018 rose 4 percent to $340 million, from $327 million in fiscal 2017, and represented approximately 44 percent of total operating costs.

Upward pressures on the School’s salaries and benefits expenses have intensified in recent years. Growing the faculty in an increasingly competitive marketplace is a priority for the School. Recruiting top talent to fill open staff positions is becoming more challenging as the employment market tightens.

Offsetting these pressures—as well as underlying inflation in employee compensation—is key to the School’s cost-control strategy. Carefully managing the growth of the School’s administrative staff is central to these efforts, including focusing staff headcount growth in functions that are strategically important. The School also works aggressively to control benefits expense through disciplined vendor selection and management.

As a result of these efforts, the increases in staff FTE positions and total compensation expense for fiscal 2018 both came in below the School’s forecast. 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. Net of retirements and departures, the size of the HBS faculty decreased to 225 FTEs in fiscal 2018, from 233 FTEs a year earlier.

The School’s administrative staff grew to a budgeted 1,721 FTEs in fiscal 2018, from 1,680 in the prior year. In large part, these new staff positions were focused on capitalizing on growth opportunities in HBP and HBS Online. Other positions were added to support the MBA program and assist faculty research efforts, including the Global Initiative and the Kraft Precision Medicine Accelerator.

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 country of origin or their financial resources, is a longstanding commitment of the School.

The prospect of entering or returning to the workforce 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 fellowship expense for fiscal 2018, including assistance for MBA students, doctoral candidates, and a limited number of Executive Education participants, increased by $2 million, or more than 4 percent, to $50 million from fiscal 2017.

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. Average fellowship support per student increased 4 percent in fiscal 2018 to $38,959, from $37,312 in the prior year. Over the past five fiscal years, the School’s average two-year MBA fellowship award has grown from $59,358 for the Class of 2014 to $80,000 for the Class of 2019.

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 $6 million in fiscal 2018.

Publishing & Printing

Publishing and printing expense includes HBP’s production costs plus a small amount of spending related to the School’s printed materials and publications. HBP’s continuing growth in a fast-changing and highly competitive publishing environment reflects, in part, the success of the group’s strategic investment in digital infrastructure and content.

While continuing to make growth-focused investments in fiscal 2017, HBP responded to a slowdown in revenue growth by taking aggressive steps to limit its operating costs. The publishing group used fewer contract resources than planned, while postponing certain capital projects and vendor agreements. As a result, the School’s total publishing and printing expenses for fiscal 2017 were $70 million—unchanged from the prior year.

Publishing & Printing

This expense category includes a portion of HBP’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 printing expense, which increased in fiscal 2018 as circulation grew. These costs also include strategic investments in digital infrastructure and content, designed to extend the group’s record of consistent growth in a dynamic and challenging publishing environment. The School’s publishing and printing expenses for fiscal 2018 increased by $4 million, or nearly 6 percent, from the prior year, to $74 million.

Space & Occupancy

The HBS campus includes 35 buildings encompassing more than 1.8 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 under this category are expenses related to dining facilities and other campus services, and costs associated with leased space for HBP, HBS Online, and the School’s global research offices. In addition, residence costs for executive program participants are reported as space and occupancy expenses.

The School’s space and occupancy expenses for fiscal 2018 grew by $3 million, or more than 4 percent, from the prior year to $71 million, driven primarily by growth in campus services personnel and associated compensation costs. This increase was partially offset by slower growth in energy-related utilities costs. The School’s investments in facilities upgrades, renewal, and modernization over the past 10 years have substantially reduced its energy consumption, as well as its greenhouse gas emissions.

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 HBP and HBS Online, and compensation for faculty who teach Executive Education programs. The School’s professional services expenses for fiscal 2018 rose by $5 million, or nearly 8 percent, from the prior year to $68 million.

This increase stemmed, in part, from the reclassification of certain costs from the supplies and equipment, and other expense categories. It also reflected higher Executive Education faculty compensation costs as more program weeks were offered. These increases were partially offset by successful expense control efforts at HBS Online.

IT has been a major contributor to higher fixed costs at HBS in recent years. Slowing the rate of growth in this expense category is one of the School’s key financial objectives. Fiscal 2017 marked the conclusion of several strategically important IT projects, so technology project spending was down substantially in fiscal 2018. As a result, the School’s total IT investment decreased by $3 million, or more than 3 percent, from fiscal 2017 to $82 million.

Nonetheless, fiscal 2018 was an active year for IT investment at HBS. The School rolled out a new post-Campaign alumni website, while also completing networking, audio, and video technology implementations at Klarman Hall. Mobile apps for MBA students were launched, and network security and desktop computing enhancements were implemented across the campus.

Supplies & Equipment and Other Expenses

These expenses for fiscal 2017 decreased by $2 million from the prior year to $12 million. The year-earlier amount was unusually high because of a one-time, $5 million recategorization from space and occupancy. Fiscal 2017 spending in the other expenses category, which includes items such as travel and catering, increased by $2 million from the prior year to $75 million, reflecting planned expansion in these activities across the School.

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 2018. The School’s total capital expenses increased to $92 million, from $78 million in the prior year. As in fiscal 2017, these investments were primarily funded by internally generated cash, and there were no new borrowings. HBS paid down $8 million in building debt in fiscal 2018.

As a result, the School’s year-end fiscal 2018 building debt-to-asset ratio decreased to 1.1 percent, from 1.4 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 and retention incentive—increased by $1 million from fiscal 2017 to $27 million.

The School’s debt service expense consists of interest payments to the University and is covered by using cash from operations. Fiscal 2018 debt service expense was $3 million, down by $1 million from the prior year. As in fiscal 2017, 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 expenses in fiscal 2018.

University Assessments

University assessments cover essential services provided to HBS by the 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 2017 for these assessments increased by $2 million from the prior year to $24 million.

University Assessments

University assessments cover essential services provided to HBS by the 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 2018 for these assessments was flat with the prior year at $24 million.

Depreciation

The School computes depreciation using the straight-line method over the estimated useful lives of the assets. Depreciation expense for fiscal 2018 increased by $2 million, or 5 percent, from the prior year to $42 million. This increase primarily reflected the School’s larger asset base following the opening of the Chao Center and Life Lab in fiscal 2016 and 2017, respectively.

Cash Before Capital Activities

The School’s cash from operations increased in fiscal 2018 by $21 million from the prior year to $90 million. As in fiscal 2017, this cash was largely generated by margin contributions from Executive Education and HBP, as well as generous giving to the School by alumni and friends as the Campaign concluded. In addition, depreciation is a non-cash item that added back $42 million to the School’s cash flow in fiscal 2018, compared with $40 million in the prior year.

Net Capital Expenses

The School’s total capital investment increased to $92 million in fiscal 2018 from $78 million a year earlier. The increase was driven primarily by expanded construction activity at Klarman Hall, which HBS substantially completed during the year. Fiscal 2018 capital activity also included multiple smaller projects designed to preserve the value of the HBS campus for future generations by preventing deferred maintenance, reducing the School’s environmental footprint, and enhancing sustainability. 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 2018 increased to $79 million, from $8 million a year earlier. In addition to higher capital spending, the increase was driven by planned declines in capital project pre-funding and the timing of the receipt of cash gifts for capital projects. In contrast to fiscal 2017, when campus investments were primarily supported by capital gifts made early in the Campaign, the School’s fiscal 2018 capital projects were largely funded with internally generated cash.

Changes in Debt & Other

The School’s debt and other cash activities decreased by $80 million in fiscal 2018, compared with a decrease of $60 million in the prior year. This decrease was primarily driven by a transfer of $65 million in unrestricted cash to the HBS endowment, made possible by the School’s strong operating surplus. HBS made a comparable $50 million cash transfer to the endowment in fiscal 2017.

Because gifts, internally generated cash, and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2018 marked the School’s 10th consecutive year with no new borrowings. Debt principal payments remained level with fiscal 2017 at $8 million.

Capitalization of endowment income—or cash used to purchase endowment units—was a $2 million use of cash in fiscal 2018, compared with $4 million in 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. As in fiscal 2017, decapitalization of endowment income—or cash drawn from endowment appreciation—was a $3 million source of cash in fiscal 2018.

Ending Balance/Unrestricted Reserves

More than 50 percent of the School’s revenues come from Executive Education and HBP—business units that are highly sensitive to the economy. Consequently, maintaining an ample balance of unrestricted reserves outside the endowment is crucial in providing HBS with sufficient liquidity to finance ongoing campus renewal and expansion projects, and to capitalize on unforeseen strategic opportunities through economic cycles over the long term.

Driven by the School’s continued healthy cash from operations, fiscal 2018 was a successful year in this regard. After the $71 million year-over-year increase in net capital expenses, as well as the $65 million of unrestricted, internally generated cash transferred to the endowment, HBS concluded fiscal 2018 with an unrestricted current use reserves balance of $118 million, compared with $145 million in fiscal 2017. This level is substantially above the $100 million in unrestricted reserves established by HBS as its current liquidity management target.