preserving core activities positioning for the future ... · annual report 2009 5 in millions for...

ANNUAL REPORT

PRE SE RVI NG CORE ACT IV IT I E S

POS IT IONING FOR THE FUTURE

2009

contents

dean jay light

A Conversation with Dean Jay Light . . . . . . . . . . . . . 2Five-Year Financial Data Summary . . . . . . . . . . . . . . 5From the Chief Financial Officer . . . . . . . . . . . . . . . . 6Statement of Activity & Cash Flows . . . . . . . . . . . . 12Consolidated Balance Sheet . . . . . . . . . . . . . . . . . 13Supplemental Financial Information . . . . . . . . . . . . 14

“ I believe we have been successfulin preserving the integrity of thelearning experience, our commitmentto financial aid for students, andour investments in faculty research.We’re staying true to our mission.”

2 harvard bu s i ne s s school

Can you talk about how the School responded to the

global economic crisis and what you’ve learned as a

result?

It was a pretty remarkable time to be on campus. Oneof the benefits of having a curriculum based on casestudies is our ability to respond in real-time, so eachweek I’d hear new examples of how faculty were in-corporating elements of the evolving crisis into theircourses. One faculty member, for example, who wasco-teaching a course on consumer finance with a col-league at the Law School, simply built a session arounda pending piece of legislation on a proposed financialproduct safety commission. In the required curriculum,our Finance and our Leadership and CorporateAccountability faculty wrote and co-taught a case onJP Morgan and Bear Stearns, exploring issues such ascapital and liquidity, and internal and external gover-nance. Multiply these examples again and again, andyou’ll get a sense of the activity under way.Outside theclassroom, faculty were writing op-eds and testifyinginWashington, and our students were attending paneldiscussions and rethinking their postgraduation plans.

There definitely were some lessons. I think we sawquickly where we needed to strengthen the MBAcurriculum, including areas such as risk managementand understanding the increasingly connected interfaceof business and government.We’ll need to find newways to help our students think about these challengeswithout stifling innovation and entrepreneurialism.

And our faculty have been rethinking what they knowand what they thought they knew.We had a series ofwhat we called “deep dive” seminars through thespring where they could present early stage research;it turned out to be a good forum for people fromdifferent backgrounds to share their perspectives andexperiences, and is leading to some important newresearch streams.

The financial crisis prompted criticism of business

leaders and raised questions about the relevance of

the MBA. What are the implications for HBS?

The financial crisis shined a light on leadership—goodand bad.Clearly there are areas where business schools—HBS included—need to be doing more.At the sametime, the crisis revealed just how deeply importantthe MBA and management education are in preparingstudents for an increasingly complex business world.As companies become more global, as they becomemore dependent on science and technology, as the paceof change increases, as organizations become flatter andmore networked, much more is expected of corporateleaders.We see this as a huge opportunity, and indeed aresponsibility, for the School.

So the need for leaders who know how to make adifference in the world has never been greater than it istoday.The need extends beyond business to the social,government, and nonprofit sectors as well.We preparestudents to become leaders by cultivating qualities thatwe believe are fundamental to good leadership.Thingslike judgment that leads to sound decision-making.An entrepreneurial point of view.The ability to listenand communicate effectively.A deep sense of one’s valuesand ethics.And the courage to act, based on thosevalues and ethics.

People with an MBA education are moving into posi-tions of responsibility and leadership more quickly thanin the past.And it’s not just in large or medium-sizedfirms. It’s in small companies, and entrepreneurialventures, and hospitals, and education—it’s everywhereyou look.

Even so, the spring of 2009 was a more difficult time

for MBA recruiting. What did the School’s graduating

MBA class experience in their job searches?

I’ve been on the faculty long enough to see both sidesof the recruiting cycle—years when students havemultiple job offers and recruiters are anxious about

AConversation with Dean Jay Light

annual re port 2 0 0 9 3

who they’ll get, and years when recruiters aren’t postingmany jobs and students are anxious about where they’llgo. Last year threw a new twist into the experience, asentire sectors withdrew from the job market.

Our Career and Professional Development team hadbeen watching signs and preparing for a down year, andwe began investing in things like career coaches evenbefore the year was fully under way.And then wewaited for the anxiety to set in. Surprisingly, however,it didn’t. Students were notably more thoughtful inapproaching their job searches, and more willing toengage in long-term planning.

By the end of the year, our numbers were down butnot as badly as we’d anticipated.Three months aftergraduation, 87 percent of the graduating studentsseeking a job had accepted an offer, compared withpercentages in the low- to mid-90s for the few yearsbefore. Satisfaction with their offers dropped slightly,from 8.3/10 for the Class of 2008 to 8.0/10 for theClass of 2009. But judging by the many students Ispoke to throughout the year, they were excited aboutthe opportunities ahead of them, and the potentialto make a difference. It was great to see.

You’ve talked a fair bit about the MBA Program.

How did the crisis affect the School’s other programs—

Doctoral and Executive Education?

Well, our graduating doctoral students faced a difficultjob market too.With most universities cutting budgetsand in some cases reducing their faculty, tenure-trackslots simply were hard to find. Fortunately, the majorityof our students still were placed at top business schools.

In Executive Education, we feared a real drop-off inprogram attendance as companies scaled back on lead-ership development activities.The reality wasn’t as bad,which we attribute at least in part to the investmentswe’ve made in corporate relations over the past 3–5years.The decline we did experience was largely incustom programs, which makes sense. In difficult times,few companies would believe it’s the right moment tosend groups of management away, no matter how goodthe purpose.

Programmatically, we saw the same case and coursedevelopment unfolding in Executive Education.We of-fered new programs on understanding the crisis and itscauses and on managing in a downturn, among others,

as well as additional sessions of popular programs toensure we could meet our revenue targets.That’simportant to us, because the revenue, in turn, is a keysource of support for the faculty’s research.

The 2008–09 recession may have been the first truly

worldwide economic downturn. Does this affect the

School’s global strategy?

Having a global presence continues to be really impor-tant to the School’s future. Our philosophy is thatsome knowledge can only be gleaned at the source.So our strategy is to get out on the ground where peo-ple are doing business around the world and bring thatknowledge back to the campus.The School’s globalresearch centers are central to our success in that regard.They give faculty reach into every corner of the world.In the case of the financial crisis, we are able to studysystemic issues on a global scale, which helps us thinkmore comprehensively about how to prevent themfrom happening again.What kinds of organizationaland managerial safeguards are necessary?What kind ofculture guarantees that people are thinking about therisks involved?What kinds of compensation systems areappropriate in an environment of short-term volatility?These questions have relevance everywhere in the world.

Of course the global work of the faculty had relevanceprior to the crisis, and it continues to be important.We need to understand how leaders of companiesaround the world engage in global competition, buildglobal supply chains, and navigate global financialmarkets: for example, understanding how an Indianmanufacturer of tractors and other farm equipment isthinking about competing in Eastern Europe, orhere in the U.S. for that matter.You can’t learn all thesethings from Boston.


As part of an expanded global strategy, we are planningto offer Executive Education programs in locationsbeyond Soldiers Field. For example, this coming yearwe will be using a new facility in Shanghai to serve asa place for our faculty to teach and to learn fromexecutives from China and Asia.The space in Shanghaiwill also be a home base for our MBA students duringthe China immersion in January.We have beendeveloping new programs in India and Europe as well.

Turning to the financial position of the School, the

Harvard endowment lost nearly $11 billion in value in

the year ended June 30, 2009. Are you facing leaner

times at HBS?

After the collapse of Lehman Brothers, the speed of thedescent and the degree of the crisis were obviously sur-prises.We responded in the fall of 2008 by immediatelyreducing some of our operating expenses.

We made additional budget cuts in January 2009, andthen in the spring of 2009, we launched a major costreduction program in order to accommodate what wassurely going to be a reduced endowment distributionin 2010 and possibly well beyond that.We tried to getall of that out of the way early, and I believe we have, sothat our cost structure is now fully adjusted to a lowerlevel of endowment distributions.

My view is that you need to react quickly and withmeasures large enough to make sure the reductionsonly have to be made once.What you don’t want to dois to get in a position where you have to ask peopleto cut their budgets three years in a row.We also stayedaway from making across-the-board cuts.We askedeveryone in the HBS community to think about howwe need to do things differently, and they respondedto the challenge extremely well.

While we have reduced costs significantly, I believe wehave been successful in preserving the integrity ofthe learning experience, our commitment to financialaid for students, and our investments in faculty research.We’re staying true to our mission.

What challenges, and opportunities, do you see

ahead?

We worked hard to reset our cost structure last year(and did), which is the good news.At the same time,there’s a lot about the future we still can’t predict.

Harvard Business Publishing, for example, is facingtremendous pressure—as is every other publishingcompany in the world—as consumers increasinglyexpect content free, in smaller online chunks, andideally on their mobile device.We have a great teamleading the organization, and they’ve retooled theirinfrastructure over the past two years to create a betterplatform for the innovations they now want to pursue.But rapid changes in the market will require us to beincreasingly flexible and responsive.

We think there are new opportunities to enhance ourExecutive Education portfolio too, but they willrequire two things: more facilities and more faculty. Onthe facilities side, we need more beds, breakout spaces,and classrooms to accommodate participants in ourshort and long programs, even as we experiment withmodular and online offerings. On the faculty side, weneed experienced individuals with a deep connectionto practice. Both of these will take time to develop.

Finally, we are citizens of and deeply connected to thebroader Harvard community, and all the ships of theUniversity will to some extent rise and fall in tandem.As the center of the University looks to recover fromlosses in the endowment, we anticipate we’ll be askedto help—in ways tangible and not—in that effort.Weare committed to doing so to the extent we don’t losefocus on our own strategic priorities.

I think it’s an important moment for the School.As Inoted, the demand for management education, and forleaders, never has been stronger.We need to continuefocusing on the core of what we do well—generalmanagement—but also look beyond the core, and applymanagement practices to address complex societalproblems in areas like healthcare, social enterprise, andthe environment.We are uniquely well positionedto do so, and to extend the impact of HBS in organi-zations both large and small around the world. I’mexcited by what I see ahead.


in millions for the fiscal year ended june 30,

2005 2006 2007 2008 2009

Revenues $ 331 $ 368 $ 405 $ 451 $ 472Expenses 307 345 375 423 438Cash from Operations 24 23 30 28 34Capital Investments 79 49 20 40 19Building Debt Outstanding 74 108 108 121 119Unrestricted Reserves 52 60 65 79 96Endowment 2,065 2,340 2,821 2,971 2,117Total Assets 2,693 3,018 3,500 3,684 2,826

Five-Year Financial Data Summary

2005 2006 2007 2008 2009

mba programApplications 6,559 6,716 7,438 8,661 9,093Percent Admitted 16% 15% 14% 12% 12%Yield 89% 91% 89% 91% 89%Enrollment 1,794 1,822 1,806 1,796 1,809Tuition $ 35,600 $ 37,500 $ 39,600 $ 41,900 $ 43,800Average Fellowship Aid per Student $ 13,299 $ 15,647 $ 17,605 $ 21,591 $ 24,393

doctoral programsApplications 587 611 694 595 798Percent Admitted 4% 5% 5% 6% 4%Yield 80% 64% 57% 81% 69%Enrollment 98 101 103 105 120

executive educationEnrollment 8,133 8,239 9,281 9,345 8,291

facultyFaculty Positions (full-time equivalents) 201 215 206 219 228Teaching Materials Produced 561 606 602 647 608Research Articles Published 103 130 145 152 146Books Published 36 31 24 24 20

staffStaff Positions (full-time equivalents) 1,044 1,077 1,109 1,146 1,187

publishingCases Sold 6,958,000 7,428,000 7,785,000 8,240,000 8,334,000Harvard Business Press Books Sold 1,272,000 1,409,000 1,882,000 2,025,000 1,478,000HBR Circulation 240,000 243,000 248,000 246,000 237,000HBR Reprints Sold 2,929,000 3,112,000 3,061,000 3,123,000 2,863,000

Key Facts


From a financial perspective, the 12 months that beganJuly 1, 2008, encompassed two profoundly differentperiods.The School’s initial fiscal 2009 budget, preparedin the spring of 2008 amid the first signs of broadeconomic weakness, reflected caution regarding therevenue outlook for Executive Education and HarvardBusiness Publishing (HBP). For the first five months ofthe fiscal year, the School’s revenues remained in linewith our initial plan.Then, the operating environmentchanged radically.

Late in 2008, as the world’s capital markets collapsed,the University announced the prospect of a 30 percentdecline in Harvard’s endowment for fiscal 2009. HBSand the other Harvard schools were asked to assume an8 percent reduction in funds distributed from the en-dowment in budgeting for fiscal 2010.At the same time,both Executive Education and Harvard Business Pub-lishing began seeing a drop-off in demand, and alumnicurrent use gifts also declined.

From the Chief Financial Officer

Any discussion of fiscal 2009, as well as fiscal 2010, must be put in the

context of the 2008–09 financial crisis and recession. More than 75 percent

of the School’s revenue comes from several sources that are sensitive to

the global economy: Executive Education, Harvard Business Publishing,

and the HBS endowment and alumni giving. Each has been deeply affected

by the downturn.

harvard business publishing revenue(dollars in millions)

FY 05 06 07 08 09

$13

9

$137

$12

8

$11

9

$10

6

executive education revenue(dollars in millions)

FY 05 06 07 08 09

$10

6

$107

$91

$81

$76


We quickly responded with an aggressive effort to re-duce the School’s spending for the second half of fiscal2009, and to develop a budget for fiscal 2010 thatreflected both lower income and fundamental changesin our cost structure.The School’s faculty and staffresponded to the challenge with impressive resolve andcreativity, enabling HBS to remain cash flow positive andconclude the fiscal year with a strong reserves balance.

Looking forward, however, both the School and theUniversity anticipate that constrained revenue growthwill continue.The HBS budget for fiscal 2010 acknowl-edges this new reality.The purpose of this letter is toprovide insight into the School’s key financial issues,accomplishments, and challenges in fiscal 2009 and,equally important, into what we see on the horizon forthe coming fiscal year.

generating revenue for operations

Total Executive Education revenue for the year wasessentially flat with fiscal 2008, but the changed eco-nomic environment significantly affected the programmix. Postponements and cancellations in customprograms in the second half of the fiscal year led to adouble-digit percentage decline in revenue.This wasoffset by open-enrollment program revenue, whichwas up 8 percent from fiscal 2008.

The School’s longer program offerings—including theAdvanced Management Program and the GeneralManagement Program—posted record applications andenrollment for the fall 2008 term.This early momen-tum offset modest decreases in enrollment in the spring2009 term. For the full fiscal year, applications to thelonger programs grew 12 percent from fiscal 2008, andenrollment increased by 6 percent. Executive Educationlaunched seven new short, focused programs in fiscal2009.Among them were two courses related to theeconomic crisis that were popular enough to warrantadditional sessions.

Harvard Business Publishing faced profound challengesin fiscal 2009. Few sectors of the economy have beenmore thoroughly transformed by the forces of digitali-zation and globalization than the publishing industry.HBP has been reinventing its business over the past fewyears to stay in front of these changes and ahead of itscompetitors, recruiting new staff members with excep-tional talent and, in fiscal 2009, restructuring the edito-rial group to better serve both the School and itsoutside markets.At the same time, HBP has been in-vesting heavily in its IT infrastructure as more of itsinternal processes, content, and customers move online.

Although the School’s publishing revenues have grownin recent years, these IT investments have limited therise in HBP’s operating margins. In fiscal 2009, theeconomic downturn prevented HBP from producing asixth consecutive year of top-line growth. Sales werestrong in the first half of the year, particularly in interna-tional markets, but weak in the second half.As a result,publishing revenue declined by $2 million, or 1 percent,from fiscal 2008, pressuring margins even further.

faculty( full-time equivalents)

FY 00 01 02 03 04 05 06 07 08 09

207

196

188

192 206215

201

204 219 228


Alumni giving, a key revenue source for the School,was also affected by the recession. In particular, fiscal2009 revenue from unrestricted current use gifts wasdown by $2 million, or 14 percent, from last year.Over the past five years, this source had grown substan-tially, totaling $71 million.

The decline in current use giving was more than offsetby a larger distribution of income from the endowment,as revenue from this source grew by $19 million, or20 percent, from fiscal 2008.Although the investmentreturn on Harvard’s pooled investments (including theendowment) was -27.3 percent for fiscal 2009, it was+8.6 percent for fiscal 2008. For the five years prior tofiscal 2008, the average annual return was +17.6percent.The School’s endowment distribution for fiscal2009,which the University determined early in calendaryear 2008, reflected this strong historic performance.

manag ing the budget

By late fall, it had become clear that our initial fiscal2009 revenue projection was too bullish. It had alsobecome clear that—even with skillful investmentmanagement and a rebound in the markets—it wouldlikely be a long time before the University endowmentrecovered its steep losses.

HBS acted immediately to adjust to this new budgetreality, imposing restraints on staff hiring, limiting theuse of overtime, cutting back on the use of temporaryemployees and contractors, trimming catering andutility costs, and freezing salaries.At the same time,faculty and staff took the initiative to reduce spendingin myriad ways across the School.The cuts at HBP wereextensive, driven by aggressive expense managementas well as reductions in variable costs as the publishingbusiness contracted.

We also reduced administrative staffing levels.A combi-nation of normal attrition, voluntary early retirements,and layoffs effective July 1, 2009, has pared the size ofthe School’s fiscal 2010 staff by 100 full-time equiva-lents (FTEs) or 8 percent.Those employees facinglayoff were offered enhanced severance benefits as wellas extended outplacement services to help ease theirtransition to a new position in a difficult job market,whether within or outside Harvard.

The size of the HBS faculty increased in fiscal 2009.The School ended the year with 228 faculty full-timeequivalents (FTEs), up from 219 in fiscal 2008.However, the School begins fiscal 2010 with 10 fewerfaculty FTEs than in fiscal 2009: fewer new faculty wererecruited than planned, and short-term appoinments—as visiting faculty or senior lecturers, for example—werelower than budgeted.

investment in research(dollars in millions)

FY 05 06 07 08 09

$10

2

$97

$92

$84

$77


In addition, reflecting the difficult job market ourMBA students were facing, the School committed ad-ditional career services resources to help with coaching,networked job searches, and other placement initiativesin fiscal 2009.As a result of these efforts, 87 percentof 2009 graduates seeking employment had accepted ajob offer three months after graduation.This compareswith an average of 93 percent during the prior five-year period.

protecting key prioritie s & initiative s

In developing budgets this past year, we have made itconsistently clear that the key engines of the School—our educational programs and faculty research—shouldbe protected. HBS achieved a number of notableaccomplishments in fiscal 2009, even as our energiesand attention have been focused on managing throughthe downturn.

With the launch of a University-wide academic calen-dar and a January term in fiscal 2010, we increased thenumber of MBA immersion programs, where faculty-led groups of students take a deep dive into a particularregion or topic. Immersions launched in fiscal 2009included new sessions on entrepreneurship in SiliconValley, venture capital in Israel, business opportunitiesin emerging markets in Mexico, and value-basedhealthcare delivery in Boston. Several new immersionsare planned for fiscal 2010.

For the past few years, HBS faculty working groupshave been focused on driving MBA curriculum changeat the School in the areas of leadership, globalization,and critical and analytical thinking. Leveraging workon the future of MBA education undertaken duringthe School’s centennial early in fiscal 2009, these groupswere charged with developing ideas to strengthen ourstudents’ development along these dimensions.We ex-pect these ideas to begin driving curricular innovationat HBS in the years ahead.

capital investment(dollars in millions)

FY 05 06 07 08 09

$40

$19

$20

$49

$79

i .t. investment(dollars in millions)

FY 05 06 07 08 09

$46 $55

$37

$28

$31


HBS has invested heavily over the past decade in fellow-ship support for students, increasing spending in thisarea at a compound annual rate of 14 percent andeffectively reducing the real cost of attendance for stu-dents receiving aid. In fiscal 2009, fellowship spendingincreased nearly 27 percent from the prior year. Netstudent income—tuition and fees, minus the School’sspending for fellowships—decreased by $5 million, ornearly 9 percent, from the prior year.

The School is planning continued—if more modest—fellowship growth in fiscal 2010 so that HBS cancontinue to attract outstanding students to its MBA andDoctoral programs, regardless of background or need.We expect this additional fellowship spending toreduce net tuition income even further, forcing evengreater reliance on economically sensitive sourcesof revenue to fund the School’s operations. Newrestricted current use gifts designated for fellowshipsoffset this need.

On the research side, protecting key priorities hasmeant helping faculty accomplish more with fewerdollars.The School’s total investment in facultyresearch was down roughly 5 percent from the prioryear in fiscal 2009. In an environment of slowerresource growth, the School’s key goal is to continuefostering ambitious faculty research, but with morefocus on controlling costs and fully realizing theefficiencies of shared resources such as the School’scentralized research services.

More than 10 years ago HBS began launching a rangeof strategic initiatives, including global, healthcare,entrepreneurship, social enterprise, science-based busi-ness, leadership and, more recently, business and theenvironment.While their stage of development, scope,and other characteristics may be quite different, at theirheart is a common group of faculty with shared researchinterests as well as students and often alumni with careerinterests or professional experience in the field.

These initiatives are becoming a means for increasingcollaboration with other parts of Harvard, and a lensthrough which to address systemic societal challengeslike education and the environment, and the Schoolwill continue to invest in them.Moreover, on theglobal front in particular, HBS is committed to deepen-ing its engagement with China, and will be offereinga range of programs—including Executive Educationand MBA immersions—in Shanghai.

total fellowship spending(dollars in millions)

FY 05 06 07 08 09

$26

$33

$22

$19

$17

mba fellowship spending(dollars in millions)

FY 05 06 07 08 09

$21 $25

$17

$15

$13


looking ahead

As we begin fiscal 2010, even the most optimisticforecasts call for a slow and uneven recovery from therecession.Although the economy appears to havestabilized, HBP in particular, as well as Executive Edu-cation, tend to be lagging indicators.Thus, it may takesome time before two of the School’s major sources ofincome recover their growth momentum. In addition,as predicted by the University nearly a year ago, theendowment’s negative return for fiscal 2009 will leadto lower distributions beginning in fiscal 2010. Finally,alumni giving—an important source of revenue forthe School—may also take time to recover.

The School’s fiscal 2010 budget takes these anticipatedheadwinds into account and forecasts a drop in totalrevenues of $40 million, or 8.5 percent, from fiscal2009.To ensure that HBS continues to operate withinits means, total expenses are budgeted to decline by$18 million, or 4.1 percent, from fiscal 2009 actualspending.This represents a drop of $40 million, or 10percent, from fiscal 2009 budgeted spending.The de-crease primarily reflects lower anticipated variable costsfor HBP and Executive Education because of slowerbusiness activity, as well as a decline in salaries and ben-efits expenses because of reductions in faculty and staff.

One area where expenses may rise is University assess-ments. Given the endowment losses sustained in fiscal2009, there is likely to be less endowment incomeavailable to support the University’s central administra-tive functions for the next several years.As a result,HBS and the other Harvard schools may be asked toshoulder more of these costs.

Overall, we expect HBS to remain solidly cash flowpositive in fiscal 2010. In addition, reflecting thegrowth in cash from operations in fiscal 2009, theSchool begins the new fiscal year with an unrestrictedreserves balance of $96 million, up $17 million fromlast year, and well within our long-term target.Reserves are used by HBS to capitalize on strategicopportunities and, when needed, to finance construc-tion of new campus facilities.

Our strong reserves balance positions HBS to continueenhancing the campus, even if we encounter constraintson the School’s ability to borrow from the University.To enhance its flexibility, Harvard issued $1.5 billion intaxable bonds in December 2008. In order to maintain

its AAA credit rating, the University’s ability to assistHBS and other Harvard schools with debt financingmay be limited.

Still, many questions remain about the underlyinghealth of both the global economy and the School’ssources of income. Given the past year’s decline in thevalue of the endowment and the challenges facingHBP as it reinvents its business, the School’s revenuetrajectory is anything but definite.

We are committed to protecting the School’s keypriorities and strategic initiatives through this periodof uncertainty. Broad conversations about the futureof MBA education, the publishing industry’s digitalmigration, and changes in the market for ExecutiveEducation all were under way at HBS long before therecession unfolded, and will persist once the economyis again on more solid footing.

We are thinking holistically about each of these topicsin the context of the School’s curriculum, faculty, re-search agenda, and the HBS campus and community toensure that our planning leads us toward broader andlonger-term goals in the years ahead.The School’s MBAfellowship spending will continue to grow.The facultywill continue to drive innovation in MBA educationand create new knowledge. HBS will continue toinvest in academic innovation and in campus integrityand expansion.

We remain committed to thoughtful and responsiblestewardship of the School’s resources in pursuit of thesegoals.

richard p. melnick, mba 1992chie f f inancial officerseptember 30, 2009



Statement of Activity & Cash Flows*

2009 2008 2007

revenuesMBA Tuition & Fees $ 84 $ 82 $ 77Executive Education Tuition 107 106 91Publishing 137 139 128Endowment Distribution 113 94 78Unrestricted Current Use Gifts 12 14 17Housing, Rents, & Other 13 9 9Interest Income 6 7 5

total revenues $ 472 $ 451 $ 405

expense sSalaries & Benefits $ 212 $ 206 $ 179Publishing & Printing 52 53 51Space & Occupancy 42 42 40Supplies & Equipment 12 11 9Professional Services 31 29 25Fellowships 33 26 22University Assessments 13 12 11Debt Service 6 7 7Other Expenses 37 37 31

total expense s $ 438 $ 423 $ 375

Cash from Operations $ 34 $ 28 $ 30Use of Endowment Gifts or Appreciation 11 41 14

cash before capital activitie s $ 45 $ 69 $ 44

Capital Expenses $ (19) $ (40) $ (20)Use of Gifts for Capital Projects 0 5 3

net capital expense s $ (19) $ (35) $ (17)

New Borrowings $ 3 $ 22 $ 7Debt Principal Payments (5) (9) (7)Other Activity (7) (33) (22)

net debt & other $ (9) $ (20) $ (22)

change in unrestricted reserves $ 17 $ 14 $ 5beginning balance, unrestricted reserves $ 79 $ 65 $ 60ending balance, unrestricted reserves $ 96 $ 79 $ 65

* This statement presents a managerial view of Harvard Business School operations focused primarily on cash available foruse. It is not intended to present the financial results in accordance with generally accepted accounting principles (GAAP).A presentation in accordance with GAAP would report higher operating revenues for gifts and endowment distribution andwould include depreciation expense, yielding income from operations of $31 million in fiscal 2009. Cash flows, however,would be equivalent under GAAP.


Consolidated Balance Sheet

2009 2008 2007

assetsCash $ 8 $ 14 $ 16Unrestricted Reserves 96 79 65Receivables, Loans, & Other Assets 161 176 182Invested Funds:

Endowment Investments 1,971 2,804 2,654Current Fund Investments 33 27 16Interest in Trusts Held by Others 113 140 151

Facilities, Net of Accumulated Depreciation 444 444 416

total assets $ 2,826 $ 3,684 $ 3,500

liabil itie sDeposits, Advances, & Other $ 37 $ 38 $ 39Deferred Revenue 52 63 50Other Debt Owed to University 26 29 26Building Debt 119 121 108

total liabil itie s $ 234 $ 251 $ 223

composition of net assetsUnrestricted Reserves $ 96 $ 79 $ 65Undistributed Income & Other 5 18 33Pledge Balances 39 33 40Student Loan Funds 10 10 10Investment in Facilities 325 322 308Endowment & Other Invested Funds 2,117 2,971 2,821

total assets net of liabil itie s $ 2,592 $ 3,433 $ 3,277



Sales of these offerings enable HBS to advance thepractice of management,while typically generating morethan 50 percent of the School’s total annual revenues.Completing the cycle, contributions from HarvardBusiness Publishing (HBP) and Executive Educationserve as the mainstay sources of funding for the faculty’sresearch.

Faculty at HBS do not seek grants from outside sponsorssuch as government agencies, foundations, and corpora-tions. Instead, their research is funded primarily by theSchool. Freedom from the constraints associated withexternal funding enables the School’s faculty to pursuethe research opportunities they believe have the greatestpotential to create new knowledge.

Revenue from gifts to HBS—in the form of endow-ment distributions and current use giving—has grownin recent years to more than 25 percent of the School’stotal income.This growth has been driven by stronglong-term investment returns on the endowment priorto fiscal 2009 and new endowment gifts, as well as theHBS community’s generous class reunion and annualgiving. In general, though, HBS relies far less onendowment income as a source of revenue than otherHarvard schools.

At less than 20 percent of total revenues,MBA tuition,fees, and related student income also play a relativelysmaller role in the HBS business model compared withthe other Harvard schools and with higher educationgenerally.

Harvard’s schools and other operating units face a rangeof challenges that differ in magnitude, and thus needflexibility to shape solutions locally. Consequently, HBSsets strategic goals, administers operations, and managesits finances independently.At the same time, theSchool strives to ensure that local decisions take shapewithin a set of overarching University considerations—both academic and financial.These considerationssignificantly affect annual operating budgets and capitalinvestment planning at HBS.

Supplemental Financial Information

The work of Harvard Business School is sustained by a business model that

is unique among the Harvard University schools and in higher education.

In a self-sustaining cycle, HBS globally disseminates the intellectual

capital produced by the faculty through Executive Education programs

and Harvard Business Publishing.

cash received from g ifts(dollars in millions)*Campaign year

FY 05* 06 07 08 09

$51

$37

$56

$55

$12

3


endowment income

Like other Harvard schools, HBS raises its own endow-ment and current use funds.The School independentlybudgets the use of endowment distributions to supportoperations according to the terms of each gift.The HBSendowment, along with those of the other Harvardschools, is managed by Harvard Management Company(HMC), a subsidiary governed and wholly owned bythe University.

The HBS endowment consists of more than 1,000discrete funds established over the years by individualdonors, reunion classes, corporations, and foundations.Although most endowment gifts are made in perpetuity,allowing little or no access to principal, some allowaccess to principal to provide the School flexibility inachieving the purposes for which they were designated.In addition, the School occasionally draws on capitalappreciation associated with prior-year gifts. Fundsfrom these decapitalizations are used to support keyinitiatives in keeping with donor intentions.

Harvard determines the amount that can prudently bedrawn from the endowment to spend in any given year.This calculation is based on a rigorous payout policy thatreflects past endowment performance and HMC’s pro-jections of future investment returns.The University’slong-term target has been to distribute between 5 and5.5 percent of the endowment’s market value annually.The distribution includes an assessment of .5 percentof the year-end market value to cover a portion of uni-versity central administration costs.

The University’s endowment spending percentage of4.6 percent for fiscal 2009 was determined early incalendar year 2008—more than six months before theworldwide market correction began—and reflectedthe endowment’s strong absolute and relative perfor-mance in the preceding years. Reflecting this spendingpercentage and growth in the market value of the

endowment, the School’s endowment distributionrevenue continued to increase in fiscal 2009, rising by$19 million, or 20.2 percent, to $113 million from$94 million a year earlier.

This growth will be reversed in fiscal 2010.Theabsolute return on the University’s pooled investments(including the endowment) was -27.3 percent for fiscal2009, net of all fees and expenses.After including allgifts received and subtracting annual distributionsand decapitalizations, at June 30, 2009, the Universityendowment was valued at $26 billion—down by $10.9billion, or 29.5 percent, from $36.9 billion a year earlier.The market value of the HBS endowment, togetherwith current use funds, decreased by approximately$900 million, or nearly 30 percent, from $3 billion atJune 30, 2008, to $2.1 billion.

Consistent with its endowment goal of providing theHarvard schools with a reliable stream of operating in-come over the long term, the University has advised theHarvard community to prepare for smaller endowmentdistributions over the next few years. For fiscal 2010,endowment distribution income is budgeted to declineby $15 million, or 13.3 percent, from fiscal 2009.

$37

$51

g ifts received(dollars in millions)

FY 08 09

$ 18 Endowment

$ 7 Restricted Current Use

$ 12 Unrestricted Current Use

Endowment $ 23

Restricted Current Use $ 14

Unrestricted Current Use $ 14

........................................................................................................................................................................................................................................

........................................................................................................................................................................................................................................

........................................................................................................................................................................................................................................

........................................................................................................................................................................................................................................


revenue sources by harvard university school, fy 2009(percent of total revenue)

1 Other for HBS includes Harvard Business Publishing.2 Student Income for HBS includes MBA and Executive Education.

Other

Gifts for Current Use

Sponsored Support

Student Income

Endowment Income

endowment returns

Eng

inee

ring&

App

liedScien

ces

Facu

ltyof

Arts&

Scien

ces

Governm

ent

Law

Med

ical

Pub

licHealth

Rad

cliffeInstitu

te

Den

tal

Design

University

Business

Divinity

Edu

catio

n

1

2

00 01 02 03 04 05 06 07 08 09FY

32.2

-2.7-0.5

12.5

21.119.2

16.7

23.0

8.6

-27.3%

10.4

4.0

10.5 10.8

17.7

-4.4

-18.2%

16.2

-5.7 -5.9

Harvard Endowment(5-year: 6.2% / 10-year: 8.9%)

TUCS(5-year: 2.5% / 10-year: 3.2%)

80%

60%

40%

20%


endowment components, fy 2009

40% Professorships

25% Financial Aid

8% Research

8% Unrestricted

7% Special Initiatives

6% Building Operations

6% Other

endowment growth(dollars in billions)

FY 05 06 07 08 09

$3.0

$2.1

$2.8

$2.3

$2.1

endowment distribution(dollars in millions)

FY 05 06 07 08 09

$94

$113

$78

$71

$62


f iscal 2009 revenues

The School’s top-line growth slowed to 4.7 percentin fiscal 2009, from a compound annual rate of8.9 percent for the previous five years, as total revenuesincreased by $21 million from fiscal 2008 to $472million. In contrast to fiscal 2008 when Executive Edu-cation and HBP together represented more than $26million of year-over-year growth, revenue from thesecombined sources was down by $1 million in fiscal2009.This decline reflected weaker demand in both thecorporate and academic markets as the economy dete-riorated in the second half of the fiscal year.

The School’s alumni and friends continued to be gener-ous in fiscal 2009, but the market collapse and recessionclearly had an impact on giving to HBS. Income fromunrestricted current use gifts totaled $12 million, or 2.5percent of the School’s total revenue, compared with$14 million, or 3 percent of revenue a year earlier.Totalcash received from all types of gifts for fiscal 2009 was$37 million, compared with $51 million in fiscal 2008.Approximately 24 percent of the School’s MBA alumnimade a gift to the School in fiscal 2009, compared withnearly 30 percent in fiscal 2008.

The flat revenues in Executive Education and HBP anddecline in current use giving were offset by the largerendowment distribution, as well as an increase in theHousing, Rents, and Other category. Revenue in thiscategory was up by $4 million from fiscal 2008, theresult of Global Business Summit registration fees andan expansion of the MBA immersion programs.As inprior years,MBA tuition and fees increased as well,generating an incremental $2 million in revenue for thefiscal year.

revenues(dollars in millions)

FY 05 06 07 08 09

revenue components, fy 2009

29% Publishing

26% Endowment Distribution &Current Use Gifts

23% Executive Education Tuition

18% MBA Tuition & Fees

4% Housing, Rents, & Other

$451

$472

$405

$368

$331


f iscal 2009 expense s

backgroundTotal operating expenses increased by $15 million, or3.5 percent, in fiscal 2009 to $438 million, from $423million last year—roughly half the increase initiallyprojected. Early in the fiscal year, HBS anticipatedslowing revenue growth and implemented a multitudeof budget cuts that affected nearly every area of spend-ing. Aggressive expense management at HBP aloneresulted in $11 million in savings, compared with theinitial fiscal 2009 budget. In total, the School’s fiscal2009 operating expenses came in $22 million lowerthan the $460 million initially planned.

The expense reductions implemented in fiscal 2009were designed with two goals in mind.The first goalwas to ensure that the School’s operating budgetreflects an environment of slower revenue growth.Thesecond goal was to protect key priorities—academicprograms, faculty research, and strategic initiatives—while minimizing costs to the extent possible. From anexpense management perspective, these goals relate tovarious functional areas that transect a number of itemsin the School’s Statement of Activity and Cash Flows.

In HBP and Executive Education, for example, expensesinclude direct costs for staff compensation, specializedoutside professional services in areas such as IT andmarketing, and residence expenses for executive pro-gram participants.As another example, faculty researchexpense includes a significant portion of faculty salariesand benefits, as well as direct costs for research supportstaff, travel, and IT services.Also included in the costof faculty research are allocated expenses for theSchool’s network of global research centers, as well aslibrary resources, campus facilities, technology, andadministration.When viewed in this way, the School’stotal investment in faculty research for fiscal 2009 was$97 million, compared with $102 million last year.

salarie s & benefits

Compensation for faculty and staff is the School’slargest expense. For fiscal 2009, salaries and benefits ex-penses rose by $6 million, or 2.9 percent, from a yearearlier.The fiscal 2008 figure was unusually high due toa one-time expensing of both historic vacation liabilityand faculty early retirement incentives.

expense s(dollars in millions)

FY 05 06 07 08 09

expense components, fy 2009

48% Salaries & Benefits

12% Publishing & Printing

10% Space & Occupancy

8% Fellowships

7% Professional Services

3% Supplies & Equipment3% University Assessments

1% Debt Service

8% Other

$423

$438

$375

$345

$307


Amid increasing global competition for academic talent,HBS recruits aggressively and seeks creative ways to at-tract outstanding faculty.The ability to offer competitivesalary and benefits packages is crucial in this effort.Thetotal number of faculty, as measured in full-time equiv-alents (FTEs), can rise or fall in any given year as a re-sult of retirements, departures, and normal fluctuationsin recruiting activity. In fiscal 2009, the size of thefaculty grew by nine FTEs to 228, which contributedto the increase in faculty compensation expense.

HBS tightly controls administrative staff levels, addingstaff positions only when they are critical to achievingthe School’s teaching and research mission.Althoughthe operational footprint of the School has expandedsignificantly in the past five years, the number of admin-istrative FTEs has grown at a compound annual rate ofonly 3.1 percent.

In fiscal 2009, the administrative FTE budget increasedby 41 to a total of 1,187, from 1,146 at the end of fiscal2008, reflecting plans completed prior to the economicdownturn. Looking forward, the staffing reductionsimplemented for fiscal 2010 will result in a significantyear-over-year decline in total administrative FTEs.

fellowships

MBA and Doctoral fellowship spending, or financialaid, is treated as an expense line item on the School’sStatement of Activity and Cash Flows. However,increasing financial aid support for students is a long-standing strategic objective at HBS.

Generous giving by the School’s alumni and friends,coupled with strong investment returns on the HBSendowment, have significantly increased the size of theSchool’s endowed financial aid funds in the past fiveyears.Total financial aid spending, including fellowshipsfor doctoral as well as MBA students, has risen ata compound annual rate of 17.1 percent during thisperiod. In fiscal 2009, the School’s total financial aidexpense grew by $7 million, or 26.9 percent, from theprior year, to $33 million.

Since fiscal 2004, the average two-year MBA fellowshipaward has grown from $24,500 for the Class of 2005 to$49,500 for the Class of 2010. HBS will continue seek-ing ways to assist MBA students in reducing their debt

at graduation, thus broadening their career opportuni-ties in both the private and public sectors.The Schoolis also increasing its investment in doctoral education.The number of doctoral students rose to 120 in fiscal2009 from 105 in the prior year, driving commensurategrowth in spending for doctoral fellowships, stipends,and research support.

publishing & printing

Publishing and printing expenses includes HBP produc-tion costs as well as a small amount of spending toproduce the School’s other printed materials and publi-cations. Primarily reflecting lower costs for printingand paper and marketing at HBP as business activitycontracted, publishing and printing expenses weredown by $1 million in fiscal 2009 to $52 million, from$53 million a year earlier.

space & occupancy

The HBS campus includes 33 buildings encompassingmore than 1.5 million square feet of occupied space.Space and occupancy expenses includes costs related tomaintaining and operating the School’s buildings andassociated campus infrastructure. In addition, facilitiesimprovement and renovation costs that do not qualifyas capital expenses are generally categorized as spaceand occupancy.

Also included in space and occupancy are expensesrelated to dining facilities and other campus services, aswell as costs associated with leased space that housesHBP’s operations. In addition, residence expenses forexecutive program participants—equivalent to cost ofgoods sold in Executive Education—are reportedunder this category.

In the past five years, space and occupancy expenseshave risen at a compound annual rate of 6.2 percent.Despite incremental spending related to the School’scentennial activities, these expenses were flat with theprior year in fiscal 2009 as a result of midyear budgetreduction initiatives, which included cuts in campus-wide dining costs and the postponement of numerousfacilities projects.


supplie s & equipment

Spending in this area increased by $1 million, or 9.1percent, in fiscal 2009, primarily reflecting projects re-lated to enhanced IT security and business continuitymeasures.

profe ss ional service s

Professional services expenses increased by 7.6 percentin fiscal 2009 to $31 million, from $29 million in fiscal2008.Over the past five years, the School’s spendingon professional services has risen at a compound annualrate of 17.2 percent.This increase largely reflectedspending for outside contractors who assisted with HBP’sIT infrastructure upgrade and migration to a digitalproduct platform, as well as other IT projects across thecampus.The slower growth in professional servicesexpenses in fiscal 2009 was mainly due to a decrease inExecutive Education spending in this area.

university asse ssments

Expenses for University assessments are primarily cal-culated as a percent of the School’s total expenses on atwo-year lagged basis.These assessments cover essentialservices provided to HBS by the University, includingpayroll and benefits administration, processing ofaccounts receivable and payable, and legal services.University assessments increased in fiscal 2009 by $1million, or 8.3 percent, to $13 million, reflectinggrowth in the School’s expenses. University assessmentsmay rise at a faster rate in future years, as the negativeendowment returns of fiscal 2009 are likely to reducethe amount of endowment income available to supportthe University’s central administrative functions.

debt service

The School’s debt service expenses, which consists ofinterest payments to the University on building andother University debt, declined in fiscal 2009 by $1million, or 14.3 percent, to $6 million.As in the prioryear, debt service expenses were mainly associatedwith borrowings to finance campus expansion earlierin the decade.

other expense s

Other expenses were flat with the prior year in fiscal2009 at $37 million. Incremental expenses related toMBA Program innovation, career services initiatives,and the School’s centennial were offset by budget cutsin numerous areas, as well as the postponement ofspecial projects.

cash before capital activitie s

HBS invests in capital projects and covers the relateddebt service using cash from operations, as well as prioryears’ endowment gifts or appreciation.The health ofthe global economy significantly affects the School’scash flow from operations, because margins from HBPand Executive Education, income from investmentreturns on the endowment, and levels of unrestrictedgiving are all economically sensitive.

The economy also drives the School’s decisions regard-ing the use of prior years’ gifts or appreciation, availableto be spent in accordance with a donor’s wishes.These funds vary from year to year depending on thetype of gifts available, the purposes for which they weregiven, the status of the School’s initiatives related to thesepurposes, and the available appreciation.

cash from operations(dollars in millions)

FY 05 06 07 08 09

$28

$34

$30

$23

$24


At the same time,HBS adds faculty,manages its researchactivity, and invests in its revenue-generating businessesand campus infrastructure on a long-term, strategicbasis.While generally tracking these activities,the School’s expenses also reflect unforeseen strategicopportunities as they arise.As a result, cash from opera-tions can fluctuate widely from year to year as eco-nomic conditions and the School’s spending prioritieschange.

In fiscal 2009, the School’s cash from operations in-creased by $6 million, or 21 percent, to $34 million,reflecting a mix of factors. Growth in the endowmentdistribution, and to a lesser extent an increase instudent housing and tuition income, were offset by aslight decline in combined revenue from HBP andExecutive Education, a slowdown in unrestricted currentuse giving, and a modest rise in operating expenses.

At the same time, there was a decline in use of cash fromprior years’ endowment gifts or appreciation. Incomefrom this source contributed $11 million to the School’scash flow in fiscal 2009, compared with $41 million lastyear.The fiscal 2008 figure included the School’s $26million share of a University-wide strategic decapitaliza-tion of principal and appreciation from the endowment,drawn from the Harvard endowment’s strong investmentreturns in the decade prior to fiscal 2009.

Reflecting the $6 million increase in cash from opera-tions, netted against the $30 million drop in cash fromendowment gifts or appreciation, cash before capitalactivities declined in fiscal 2009 by $24 million, or 34.7percent, to $45 million, from $69 million a year earlier.

net capital expense s

The School’s capital investments in the campus peakedat $79 million in fiscal 2005 with the construction andimprovement of classroom space, the addition of newcore facilities, and major residential space renovations.Since then, as these large projects reached and nearedcompletion, the School has focused on protectingthe long-term value of the physical plant through therenewal and maintenance of buildings, campus infra-structure, and IT systems.Capital spending has declined,as a result.

The exception was fiscal 2008, when capital expensesdoubled year-over-year to $40 million, largely due torenovations of MBA residence space and classroomfacilities for executive programs.The only large capitalprojects in fiscal 2009 were the completion of renova-tions and systems upgrades in two residence halls,which represented a combined $7 million in capitalexpense. Unlike prior years, there were no gifts speci-fied for the capital projects that were under way thispast year.As a result, net capital expenses for fiscal 2009were $19 million.

building debt outstanding(dollars in millions)

FY 05 06 07 08 09

$121

$119

$10

8

$10

8

$74


net debt & other

In addition to gifts and internally generated cash, aswell as unrestricted reserves, the School finances majorcapital projects with debt financed through the Univer-sity, using leverage strategically as a means of optimiz-ing its capital structure. HBS borrows only on qualifiedcapital projects, carefully considering the interest rateenvironment, expectations for the performance of theHarvard endowment, and the availability of Universitydebt.

New borrowings have generally declined since mid-decade in line with the lower capital spending and infiscal 2009 roughly equaled debt principal payments,decreasing to $3 million from $22 million a year earlier.Debt principal payments decreased to $5 million, from$9 million in fiscal 2008, reflecting the winding downof scheduled gift pledge payments during the year.

Other non-reserve activity in fiscal 2009, primarilyconsisting of digital platform investments by HBP, was$7 million, compared with $33 million in fiscal 2008.Prior-year non-reserve activity was unusually high be-cause it included the transfer of $25 million of currentuse reserves to the unrestricted endowment reserveestablished several years ago. Reflecting the negative in-vestment returns on the University endowment infiscal 2009, the market value of this reserve was $85million at June 30, 2009, compared with $126 milliona year earlier.

The School’s balance sheet remains modestly leveraged.The University functions as a banker for Harvardschools, allowing them to borrow on a triple-A-ratedtax-exempt basis. In fiscal 2009, the School’s buildingdebt decreased by $2 million to $119 million, as the$3 million of new borrowings were offset by $5 millionof principal repayments.Other University debt—mainlyconsisting of repayment obligations to the Universityfor mortgage loans made by the School as a facultyrecruiting incentive—decreased by $3 million, to $26million.

Total debt has averaged only 4.3 percent of total assetsfor the past five years.The interest portion of theSchool’s debt service amounted to 1.4 percent of totaloperating expenses in fiscal 2009, compared with 1.6percent in fiscal 2008.At June 30, 2009, the School’sbuilding debt as a percentage of net assets was 4.6.

unrestricted reserves balance

As part of the mix with gifts, internally generated cash,and debt, HBS relies on unrestricted reserves to financecapital projects.The School also uses unrestricted reservesas a resource for capitalizing on unforeseen strategicopportunities. In fiscal 2009, the decrease in cash beforecapital activities was more than offset by declines in netcapital expenses and net debt and other activity.

As a result, the School’s year-end reserves balance grewby $17 million to $96 million. Given the uncertainoutlook for revenue from Executive Education, HBP,and the endowment, and potential constraints on theavailability of debt financing through the University,maintaining a strong unrestricted reserves balancewill continue to be one of the School’s most importantfinancial goals.

unrestricted reserves(dollars in millions)

FY 05 06 07 08 09

$79

$96

$65

$60

$52

Harvard Business School

Soldiers Field

Boston, MA 02163

This document is intended to provide insight into the way Harvard Business School manages its resources andplans strategically for its future. Further information about the School can be found at www.hbs.edu.

This report can be viewed and downloaded online at www.hbs.edu/annualreport.

Harvard Business School is led by the Dean of the Faculty in conjunction with various advisory and oversightgroups comprising faculty, staff, alumni, academics, and business practitioners. Harvard University appoints aVisitingCommittee to review Harvard Business School’s strategic goals and objectives and to provide advice and input tothe Dean.The group meets annually and reports to Harvard University’s Board of Overseers.

We welcome questions and comments from our readers. Please direct correspondence to Richard Melnick, ChiefFinancial Officer: [email protected] or to the Office of the Dean: [email protected].

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