2018 FINANCIAL REPORT DEAN OF THE FACULTY ADMINISTRATIVE LEADERSHIP Nitin Nohria Janet Cahill Executive Director, External Relations FACULTY LEADERSHIP Ronald S. Chandler Bharat N. Anand Chief Information Officer Senior Associate Dean, HBX Angela Q. Crispi Srikant M. Datar Executive Dean for Administration Senior Associate Dean for University Jean M. Cunningham Affairs Associate Dean for Faculty & Academic C. Fritz Foley Affairs Senior Associate Dean, Strategic Nancy DellaRocco Financial Planning Executive Director, Executive Education Janice H. Hammond Gabriel Handel Senior Associate Dean, Culture & Assistant Dean for Administrative & Community Educational Affairs Kathleen L. McGinn Brian Kenny Senior Associate Dean for Faculty Chief Marketing & Communications Officer Strategy & Recruiting Jana Kierstead Das Narayandas Executive Director, MBA & Doctoral Senior Associate Dean for Programs External Relations & HBS Publishing Ellen Mahoney Lynn S. Paine Chief Human Resources Officer; Senior Associate Dean for International Executive Director, HBS Initiatives Development Richard P. Melnick Leslie A. Perlow Chief Financial Officer Senior Associate Dean for Research Patrick Mullane Gary Pisano Executive Director, HBX Senior Associate Dean for Faculty Andrew O’Brien Development Chief of Operations Jan W. Rivkin Valerie Porciello Senior Associate Dean, Chair, MBA Executive Director, Division of Research & Program Faculty Development David Scharfstein Debra Wallace Senior Associate Dean, Doctoral Executive Director, Knowledge & Library Programs Services Luis M. Viceira David A. Wan Senior Associate Dean, Executive President & Chief Executive Officer, Education Harvard Business Publishing Harvard Business School is led by the Dean of the Faculty in conjunction with various advisory and oversight groups comprising faculty, staff, alumni, academics, and business practitioners. Harvard University appoints a Visiting Committee to review Harvard Business School’s strategic goals and objectives and to provide advice and input to the Dean. The group meets biannually and reports to Harvard University’s Board of Overseers. FROM THE CHIEF FINANCIAL OFFICER Harvard Business School delivered strong financial results in fiscal 2018. Revenues exceeded our forecast, driving double-digit growth in cash from operations for the fourth consecutive year. This cash flow enabled HBS to continue providing robust support for mission-driven innovation and campus investment, while maintaining the healthy balance of unrestricted reserves necessary to sustain the School’s future relevance and leadership. One of our financial goals is for HBS to field with managers who are confronting Education enrollment and higher sales serve as a living example of a well-run the most interesting business challenges across HBP’s Harvard Business Review organization, embodying the skills, tools, and opportunities. group, corporate learning, and education and frameworks taught across the divisions. HBS disseminates the resulting intellec- School’s educational programs. Trans- tual capital to educate leaders and influ- The School’s recent strategic initiatives— parency is intrinsic to achieving this goal, ence the practice of management on a including The Harvard Business School and to this end our fiscal 2018 financial global scale. Completing the self-sustain- Campaign and Harvard Business School results are reported in detail in the Sup- ing cycle, operating surpluses at Execu- Online (HBS Online, formerly HBX)—also plemental Financial Information section tive Education and Harvard Business that begins on page 8. The balance of this generated strong topline results in fiscal Publishing (HBP) supplement revenues letter discusses the School’s fiscal 2018 2018. Philanthropic income from alumni from MBA tuition and alumni gifts as key financial performance at a strategic level, giving and the HBS endowment grew by sources of funding for faculty research. as well as our financial forecast for fiscal $9 million, or 4 percent. It was a break- 2019. The model performed well in fiscal 2018, through year for HBS Online. Revenue as revenue grew faster than expenses for increased by $7 million, or 58 percent, FISCAL 2018 IN REVIEW the fourth straight year. The resulting in- driven by growing enrollment in certificate come from operations enabled the School programs, as well as a strong response to The HBS economic model is unique to continue strengthening core programs course offerings launched during the among the Harvard University schools and investing in strategic opportunities. year. As a result, the HBS Online operat- and in higher education, and begins with ing deficit declined to $5 million, com- our commitment to internally funded fac- Total operating revenue increased by pared with $10 million to $12 million in ulty research. Free from the constraints $56 million, or 7 percent, from fiscal each of the past four years since the that can come with grants and other out- 2017, compared with our forecast of zero group’s inception. side funding, HBS research budgets growth. HBP and Executive Education allow the School’s faculty to stay close to delivered a combined $35 million of Capital investment for fiscal 2018 in- practice—to pursue the questions that in- incremental revenue, year-over-year, creased 18 percent to $92 million, from terest them most, and to interact in the primarily driven by gains in Executive $78 million a year earlier. This growth FINANCIAL REPORT 2018 1 largely reflected a step-up in construction from internally generated funds invested significant difference in key areas across activity at Klarman Hall, which was in this endowment is unrestricted. the School. In addition to surpassing its substantially completed during the year. financial goal, the Campaign achieved Building the endowment reserve is a Maintaining its commitment to sustaining milestones in all four of its non-fundrais- strategic priority for HBS. The strategic the residential campus, the School also ing objectives, including alumni engage- initiatives implemented since fiscal 2011 increased its investment in facilities re- ment, student and young alumni focus, have substantially increased the School’s newal and maintenance, highlighted by a fixed operating costs. At the same time, support for One Harvard, and building major exterior renovation of Aldrich Hall. HBS has become increasingly reliant on the narrative about the role of HBS and Total operating expenses for fiscal 2018 revenue from economically sensitive business in society. rose 4.8 percent from fiscal 2017, sources to cover those higher expenses. Of the $1.4 billion in endowment and coming in below our forecast of 6.3 Faced with a prolonged recession, the current use gifts raised through the Cam- percent. Faculty and staff compensation— School’s ability to offset revenue short- paign, $1.1 billion had been received by the School’s largest expense—was up 4 falls with unrestricted annuity income the School as cash at year-end fiscal percent, versus the 5 percent we antici- from the endowment will be crucial. pated. Other line item expenses, collec- 2018. Outstanding pledges totaled $317 tively, grew 5.4 percent, compared with a The School’s unrestricted reserves held million. Endowment giving to the Cam- budgeted 7 percent increase, reflecting a outside of the endowment are important paign strengthened the School’s core strong and ongoing commitment to cost to the model, as well. Thanks to consis- programs by creating an impressive num- control discipline on the part of managers tent operating surpluses, HBS has long ber of new associate professorships and across the School. been successful in maintaining such fellowship funds. Fellowship Spending (in millions) MBA Total* Investment in Research (in millions) FY18 $ 37 $ 50 FY18 $ 144 FY17 36 48 FY17 136 FY16 34 47 FY16 131 FY15 32 44 FY15 123 FY14 31 43 FY14 117 * Includes Doctoral Programs and Executive Education The School’s bottom-line performance for reserves. These funds, which equate to Current use giving to the HBS Fund was fiscal 2018 reflected these revenue and retained earnings, are primarily available a key Campaign objective. HBS alumni expense dynamics. Driven primarily by for capital activities—investments aimed and friends rose to the challenge with higher margin contributions from Execu- at sustaining the residential campus for enormous generosity, achieving the tive Education and HBP, total net margin future generations. School’s $40 million target three years contribution as a percentage of revenue after the Campaign’s public launch in fis- HBS concluded fiscal 2018 with an un- grew to 10.5 percent, from 8.6 percent cal 2013. HBS Fund gift income has dou- restricted reserves balance of $118 million. last year and 7.7 percent five years ago. bled since then, growing from $22 million This balance was down from $145 million Cash from operations—the School’s oper- in fiscal 2013 to $44 million this year. Re- a year earlier, but still substantially above ating surplus—increased 30 percent year stricted current use giving has grown the $100 million in unrestricted reserves over year, from $69 million to $90 million— nearly 67 percent during the same five-year held outside of the endowment we have more than double the average of $42 period, providing seed funding for HBS established as the School’s current liquid- million over the preceding 10 years. Online, the Harvard Innovation Labs eco - ity management target. system, MBA innovation including Field Concluding the fiscal year