harvard business school: investing in innovation · professor robert steven kaplan and independent...

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Professor Robert Steven Kaplan and independent researcher Tracy L. Van Dorpe prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

R O B E R T S T E V E N K A P L A N

T R A C Y L . V A N D O R P E

Harvard Business School: Investing in Innovation

Nitin Nohria, Dean of Harvard Business School (HBS), sat in his office in Morgan Hall and prepared for a meeting of the Campaign Working Group (CWG), a group of 20 prominent alumni who had agreed to advise the School regarding its upcoming fundraising campaign. Nohria planned to discuss with them the recently concluded 2012 academic year, and also outline several key challenges he saw in 2013 and the years ahead. In particular, he wanted to discuss with them the need for increasing the funds available for experimentation and innovation at the School and why new pedagogy and thought leadership investments would be critical to the future of HBS.

When he became dean on July 1, 2010, Nohria spent his first several months actively soliciting the views of faculty, students, staff, alumni, and leaders of peer institutions. He then moved to articulate a clear agenda for the School, which he referred to as the “5-I’s” (see below). Over the next 18 months, he focused on assigning key priorities to specific faculty members and asked them to develop action plans. During the last year, the focus had been on executing these plans.

As the School’s leadership team looked back on the academic year ended June 30, 2012, they took pride in the progress that had been made: the introduction of FIELD (Field Immersion Experiences for Leadership Development), a new course in the first-year required curriculum; the creation of a university-wide innovation center—known as the Harvard Innovation Lab (i-lab)—located on the HBS campus; the launch of a cross-disciplinary research effort to address the state of U.S. competitiveness; and several other initiatives aimed at improving the ability of the School to educate leaders and make a positive impact on the world.

Despite these accomplishments, Nohria believed that much more needed to be done if HBS was to fulfill its enormous potential. He knew that the role of MBA education was changing and the School needed to continue to innovate to be on the cutting edge of these changes. In addition, as a result of difficult global economic conditions and the recent economic crisis, the legitimacy of business was being actively questioned and debated. Nohria had heard feedback from alumni and other constituencies who felt HBS needed to do more to provide thought leadership regarding the role of business and leadership in solving the world’s key problems.

Nohria believed the School had to be increasingly nimble in order to remain a leader in management education and the creation of cutting-edge thought leadership. This would require the School to experiment more extensively with alternative modes of teaching, collaborate more (both internally and with other Harvard schools), and find ways to deliver more real world experience to its students. In addition, while HBS had always prided itself on being “close to practice,” the faculty

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and the School’s leadership would need to be even more closely in touch with leaders in business and other sectors in society to continue to create research and teaching materials with power in practice.

One significant challenge was that the School’s capital structure and funding base did not make it easy to be nimble and proactive in adapting to emerging trends, or make investments in new experiments. While HBS was fortunate to have a $2.8 billion endowment as of June 30, 2012, approximately 88% of those funds were restricted to purposes that had been specified by donors. The other 12% provided the School with a payout of approximately $13 million dollars in Fiscal 2012. During that year, the School raised approximately $19 million in unrestricted and current-use donations, and generated $10 million in additional excess cash flow from operations. The bulk of this $42 million of excess cash flow was used to fund $51 million in capital projects and building maintenance, necessary IT capital spending, and other capital projects. The remainder was added to reserves to fund future capital projects.

Embedded in the operating budget were funds used to launch the new initiatives of the previous two years. In the future, Nohria believed that an even larger portion of the School’s annual budget should be invested in new pedagogy, groundbreaking research, and initiatives aimed at creating greater collaboration with other schools at Harvard. The question was how to increase the pool of flexible funding to fund these innovative projects.

One way to increase the pool was to increase the overall size of the School’s “cash flow from operations.” The leadership team knew this might be unrealistic given limitations on the School’s potential revenue sources. Another option was to increase the amount of unrestricted donations. Nohria wondered how his leadership team could better explain to HBS alumni the need for more flexible funding and that greater capital flexibility was critical to the strategic dynamism and future success of the School.

As he prepared for his meeting, Nohria reminded himself that he did not need to tackle these issues by himself. He had an outstanding leadership team of faculty and staff. He could also tap into the expertise of the School’s alumni, many of whom were providing critical advice and taking leadership roles in planning for the upcoming campaign. As he was jotting down some final thoughts there was a knock at the door. Susan Deavor, his executive assistant, told Nohria that members of the CWG were beginning to arrive, and he should get ready to join them in Baker Library. He finished organizing his notes, put on his suit jacket, and left the Dean’s Office.

An Overview of HBS

Harvard Business School was founded in 1908 with an incoming class of 33 students and a faculty of 15.1 The School was the first to award the MBA degree, although the University of Pennsylvania’s Wharton School (1881) and the Tuck School at Dartmouth (1900) preceded it in offering management education. A landmark event in the evolution of the School was when New York banker George F. Baker pledged $5 million to finance construction of the Soldiers Field campus, which upon its completion in 1927 became a key element of the School’s distinctive educational experience.

The case method had been part of HBS since 1911. At that time, it began with a different senior manager each week presenting a real problem to a class. In the first session of the week, the manager would explain the problem; in the second session, students would discuss a written problem analysis they had prepared over the intervening two days. In the third session, the manager would critique

1 Jeff Cruikshank, A Delicate Experiment (Boston: HBS Press, 1987), p. 71.

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and discuss the students’ reports. This evolved to the production of written cases. The first written case, “General Shoe,” was a single page.2

Over the School’s history, the pool of students grew to include an increasingly diverse group of women, minority, and international students and executives at all stages of their careers in MBA, Doctoral, and a suite of Executive Education programs (see Exhibit 1 for a five-year summary of these programs). All of these streams of educational and thought leadership activities came together within the context of the HBS community—its staff, students, and faculty. By 2012, about 900 new MBA and 30 Doctoral students came to campus each fall, and more than 10,000 Executive Education participants came to HBS every year. As of June 30, 2012, the School’s activities were carried out by 232 faculty and 1,198 staff and research associates that worked in a range of administrative and faculty-support roles.

Alongside its educational programs, the School had a long and distinguished record of making important contributions to business scholarship and developing knowledge with power in practice. Among the earliest business schools to establish its own Division of Research, the School encouraged and generously supported its faculty members to produce research articles, books, blogs, podcasts, and working papers that extended the classroom sphere of influence to a wider range of educators, scholars, and practitioners. To ensure the broadest communication of these ideas, Harvard Business Publishing (HBP) was formed in 1922. By 2012, Harvard Business Review (HBR) had a circulation of 256,000, HBP distributed more than 10 million cases, and Harvard Business Press sold approximately 1.6 million books annually, including 35 new titles. In addition, HBP had launched a number of digital initiatives.

Over the previous 25 years, the School’s sphere of influence had expanded to include international and global firms as well as entrepreneurial start-ups; it also included more nonprofit and social enterprises as well as governments. Similarly, the tools the School used to achieve its mission had evolved and expanded from a relatively narrow focus on industry- and discipline-based courses to a broad and diverse spectrum of integrative courses, experiential learning, and published media that touched people at a wide variety of points in their careers.

All the work of the School—its educational programs, its research, and its publication activities, as well as current and new initiatives—was aimed to advance its mission, from which the School drew its collective inspiration.

Mission

HBS’s mission was to “educate leaders who make a difference in the world.” While the words of the mission itself were similar to those used by other business schools, the meaning HBS imbued in them was distinctive:

Educate—through educational programs (MBA, Doctoral, and Executive Education) that aim to create a transformational experience, based on faculty research that aspires to provide thought leadership by being rigorous, relevant, and powerful in practice, and by disseminating the world’s best thinking through Harvard Business Publishing.

Leaders—individuals with competence and character who are viewed as leaders because they earn the trust of others.

2 Cruikshank, p. 138.


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Make a difference—creating value for society, whether as an investor, an entrepreneur, a general manager, or an active citizen.

In the world—addressing challenging issues in different sectors all across the world where business leaders can and must play a vital role.

Competitive Landscape

While HBS’s programs were continually evolving, so, too, was the marketplace they served. Competitors were pursuing the pool of potential MBA students and executive education participants with a variety of strategies.

Many schools were focusing on customization and building particular strengths in their programs, such as entrepreneurship, technology, and e-commerce. A number of schools also significantly broadened the portfolio of programs they offered, including one- and two-year programs, weekend programs, evening programs, and executive MBA programs.

A host of new and increasingly accredited educational institutions were offering on-line business education. University of Phoenix, for example, offered an MBA degree and was believed to have over 16,000 students enrolled in its program. By one estimate, two-thirds of MBAs were awarded to part-time or on-line students, and 43% of campus-based programs offered on-line degrees, some at a cost

exceeding $50,000.3

Firms were also competing with HBS at several levels. Some were creating career tracks and compensation plans to hold onto their high potential employees rather than send them to MBA programs. Others were focused on improving their ability to train their own employees.

All of these factors caused leaders at HBS to intently focus on how the School added value to students. “The leading MBA institutions will look very different 25 years from now,” Nohria stated. “Our aim is to be the leader in that new paradigm. We have to be open to looking at every aspect of what we do.”

A New Dean’s Agenda: Investment in the 5-Is

During his first two years as dean, Nohria articulated a vision and a set of priorities for the School as it entered its second century. These priorities had come to be called “the 5–I’s”: innovation, intellectual ambition, internationalization, inclusion, and integration.

Innovation The first priority was innovation in the School’s educational programs, starting

with its MBA program. HBS had regularly innovated in its required and elective curriculum over the years. Numerous case-based courses had been added to the first-year required curriculum (RC) in recent years—these included LEAD, “The Entrepreneurial Manager,” and “Leadership and Corporate Accountability” (see Exhibit 2 for the RC curriculum in 2011–12). “Building and Sustaining a Successful Enterprise,” “The Authentic Leader,” and several other new courses had been added to the second-year elective curriculum (EC) in recent years (see Exhibit 2 for highlights from the EC).

3 Jeffrey Gangemi, “Do Online MBAs Make the Grade?” Bloomberg Businessweek, August 17, 2005, http://www.businessweek.com/stories/2005-08-17/do-online-mbas-make-the-grade, accessed November 2012; MBA Alliance, “Earning an Online MBA,” http://www.mbaalliance.com/earning-an-online-mba.html, accessed November 2012.

http://www.businessweek.com/stories/2005-08-17/do-online-mbas-make-the-grade

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“Field Immersion Experiences in Leadership Development,” or FIELD, introduced in the fall of 2011, was designed to provide students—working in teams of four to six—with learning experiences that were immersive, field-based, and action-oriented. It was a yearlong required curriculum course with three modules: “Leadership Intelligence,” “Global Intelligence, “and “Integrative Intelligence.” The first module, “Fundamentals of Leadership,” engaged small teams in interactive workshops to reshape how students think, act, and see themselves. Through feedback and self-reflection, students would deepen their emotional intelligence and develop a growing awareness of their own leadership styles. “Global Intelligence” focused on immersing student teams in emerging markets and required them to develop new product or service concepts for global partner organizations around the world. The final module challenged students to synthesize the knowledge, skills, and tools acquired in their first year by designing and launching a micro-business in three months (see Exhibit 3 for a description of the FIELD course).

Intellectual ambition The School had a long history of faculty members developing innovative ideas that shaped practice. Nohria wanted to continue to strongly foster this intellectual ambition, but also believed that the School could do more to foster collaboration among its faculty, as well as with the rest of Harvard. Many of the world’s most pressing problems were sufficiently complex to require collaboration across multiple disciplines in order to develop innovative ideas and potential solutions. Healthcare, global competitiveness, sustainable capitalism, education, global poverty, and global health were just a few examples.

Under this umbrella, the U.S. Competitiveness Project was a research-led effort to understand and improve the competitiveness of the U.S.—that is, the ability of firms operating in the U.S. to compete successfully in the global economy while supporting high and rising living standards for Americans. Headed by Michael Porter and Jan Rivkin, and engaging nearly a dozen HBS faculty in total, this effort was unique in part because it was developed through close collaboration with leaders from business, labor, policy, the sciences, and other parts of academia in order to identify concrete actions for improving U.S. competitiveness. The project also surveyed HBS alumni (nearly 10,000 responded), published a special issue of HBR, launched an active website, and engaged alumni and local business leaders in various cities across the United States. By leveraging so many of HBS’s distinctive assets, the U.S. Competitiveness Project represented a model (that could be replicated for other topics) for how the School could have a greater and broader intellectual impact on important problems facing business and society.

Internationalization The School’s strategy was to become more international not by greatly

expanding its physical footprint, but by expanding its intellectual footprint, thereby providing an experience for its students that would be unmatched in its global breadth of analysis and understanding. Toward this end, the School focused on establishing regional research centers, which helped HBS faculty conduct on-the-ground research in a wide range of geographic, economic, and cultural settings, and on globally-oriented topics of their choosing. Since 1997, the School had established seven centers in six key regions and was expected to launch an eighth location in Turkey in the near future (see Exhibit 4 for a map of research centers). In addition, as part of the new FIELD course, the School arranged opportunities for students to work on real-world projects at approximately 140 company sites around the world. Finally, the School organized a number of new global immersion opportunities for its faculty.

Inclusion The Culture and Community Initiative was an effort to ensure that every member of

the community could thrive and do their best work in support of the School’s mission. Chaired by Professor Robin Ely, this initiative launched an extensive study of the culture and practices of the School that included surveying and/or interviewing all faculty and substantial numbers of students,


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as well as some staff. As a result of this work, the School undertook several new activities to improve the learning and work environment of the School. By 2012, the student culture report had been discussed in a range of faculty meetings, and the faculty culture report was expected to be completed during 2013. This effort coincided with the School’s planned celebration of 50 years of women in the MBA program with academic conferences, special features in HBR, and other events.

Integration with Harvard This final priority demonstrated a commitment to seeking out productive areas for collaboration with colleagues throughout Harvard, particularly in the areas of entrepreneurship and innovation. Success in this area could foster myriad new intellectual projects, student learning opportunities, and ultimately greater impact on practice and the world. The first project as part of this priority was the i-lab, opened in 2011 as an on-campus center where students from across the University could learn and grow their innovative and entrepreneurial ideas with faculty guidance and support. The i-lab was housed in Batten Hall and featured a classroom, flexible workspace, and conference rooms. The center attempted to leverage Harvard’s knowledge and network through for-credit courses, speakers and other programming, affiliated experts, and collaborative work/meeting space. During its first six months of operation, it welcomed more than 13,000 visitors. The center became a hotbed of collaborative and innovative new projects across the University (see Exhibit 5 for a description of the i-lab).

Funding Innovation

Historically, experiments at the School had been paid for out of the current operating budgets. If a new initiative succeeded and evolved to become a more permanent part of the School’s activities, funds were then raised to support the initiative over a longer time frame. Both FIELD and i-lab were in their early stages and were therefore funded out of the School’s general operating funds. It was estimated that FIELD would cost $10–$12 million per year and the i-lab, $2–$3 million per year.

On a historical basis, individual faculty innovation had been funded out of faculty salaries, benefits and infrastructure. Faculty members could also request additional support for their thought leadership agendas. Professor Paul Healy, Director of Research, was responsible for allocating a research budget that covered the costs of travel, research support, and other non-compensation outlays associated with intellectual inquiries. If a faculty member’s research showed particular promise, the individual’s research budget was likely to be increased. Healy believed that this budget allocation approach worked well for individual faculty research, but didn’t really mesh well with larger-scale experimentation. “We have several potential areas where we could do collaborative faculty projects, which could have a significant impact on business and society,” Healy commented. “But the fact is, these projects are in a different league in terms of expense.” For example, the U.S. Competitiveness Project required an outlay of $2 million in 2012, and was expected to cost a similar amount in both 2013 and 2014.

Healy believed that the School had the capacity to launch as many as two or three of these new projects every year. Subject areas could include public education, healthcare delivery, global health, sustainable capitalism, corporate governance, and other areas of importance to society and business practice. Healy agreed with Dean Nohria that these types of thought-leadership initiatives could dramatically increase the impact and prominence of HBS. They could also serve as a catalyst for greater collaboration among professors at HBS, across the University, and also with leading researchers at schools around the world.

Another significant expense challenge was that faculty research was becoming much more expensive than in the past. Healy observed that a growing number of faculty were involved in global


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research, which required extensive travel and sometimes involved costly field experiments with large teams of associates stationed in different parts of the world. Separately, Healy explained that laboratory and field experiments had become an increasingly common way of studying human behavior and its impact on decision-making. These experiments required expenditures for operating a lab and other attendant research costs. As a result of these trends, a small but growing number of faculty members were requesting research budgets that were two to four times the prior standard. Other faculty members were assembling unique datasets gathered directly from companies, such as private equity and venture capital firms or on multinational corporations. The availability of “big data” that was burgeoning because of the Internet had also led some faculty members to request data storage and analysis capability on a very different scale. Healy believed that these new type of research interests, although more expensive, were cutting edge and essential to continued thought leadership at HBS.

Professor Youngme Moon, Chair of the MBA Program, was actively working on innovation in the first and second years of the MBA program. Having introduced FIELD in the first year, she was now turning her attention to innovations in the second year of the MBA curriculum that would enhance student learning and engagement. In the face of increasing competition from different types of less time-intensive MBA programs, Moon felt that HBS would have to keep raising the bar on its own two-year program to demonstrate that it was superior to other options and worthy of the added time commitment and opportunity cost incurred by students. She was also concentrating on improving the School’s use of innovative IT tools in order to improve the student learning experience. Moon was closely following the emergence of e-learning platforms like Coursera (which offered courses from schools like Stanford, UPenn, and Michigan) and EdX (offering courses from MIT, Harvard, and UC-Berkeley), and had begun to explore how HBS might carve out a distinctive niche in this fast evolving space. “In this more dynamic environment, research and development will be critical to our ability to remain the preeminent business school in the world,” Moon commented. “But as with R&D in business, some experiments simply don’t work. And while it’s easy to find donor support for a proven success, it is very difficult to package and adequately explain a concept where we are in the experimentation phase. As a result, we have to rely on flexible funds to do our R&D in the MBA Program.”

The HBS Business Model

Rick Melnick (MBA 1992) had served as HBS’s chief financial officer since 2003. He had worked with three deans and helped navigate the School through the economic downturn that began in late 2007. Melnick described the School’s finances as follows:

Revenues The School had five main sources of revenue totaling $546 million in Fiscal 2012.

Each of these revenue sources was mutually interdependent—for example, you couldn’t have a robust executive education program without a robust MBA curriculum. Without thought leadership, Harvard Business Publishing and the MBA and executive programs might lose some of their resonance. The individual sources of revenues broke down as follows (see Exhibit 6 for cash flow in Fiscal 2012 and Exhibit 7 for the Fiscal 2012 Balance Sheet):

1. MBA tuition and fees ($99 million in Fiscal 2012). This was a reliable but slow-growth source of revenue, due to the School’s policy of controlling tuition increases. The School was also committed to offering increasing levels of financial assistance to ensure it was accessible to anyone talented enough to be admitted, irrespective of their financial circumstances. About 20% of the total tuition was already offered as financial aid—benefitting about 40% of the


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class. The School hoped to eventually be able to offer up to a third of its total tuition as financial aid.

2. Executive Education tuition ($142 million in Fiscal 2012). The School typically had waiting lists for its programs. Given that its on-campus programs were at close to 100% of capacity, Executive Education could not grow further without additional physical space. The School was in the midst of a significant expansion and renovation of its executive education facilities. When construction was completed in Fall 2015, capacity would be 25% greater, but the work would consume between $125-150 million of the School’s reserves.

3. Harvard Business Publishing (HBP) ($165 million in Fiscal 2012). This was a strategically important enterprise. The division produced and distributed approximately 10 million HBS cases each year. HBP had also worked to actively build its book, digital and e-learning businesses. It was, however, a fiercely competitive industry, which had seen significant contraction in recent years. It also required significant annual investments to keep pace with rapid changes in technology, such as the need to make its products accessible on a burgeoning array of digital platforms and devices.

4. Endowment payout ($109 million in Fiscal 2012). As of June 30, 2012 the HBS endowment was approximately $2.7 billion. This endowment was managed by Harvard Management Company, the University’s endowment management company. As with other endowed University entities, HBS was entitled to an annual payout of approximately 4.5% of its endowment (after a .5% assessment paid to the University). Approximately 88% of the endowment was restricted by donors (see Exhibit 8 for components of the HBS endowment), and only 12% was available to be spent on unrestricted needs of the School.

Over the previous ten years through June 30, 2012, the endowment earned returns of approximately 9.5% (see Exhibit 9 for Harvard University endowment returns). This performance placed it in the upper quartile of university endowments in the United States.

5. Unrestricted current use gifts ($19 million in Fiscal 2012). These gifts were unrestricted and available to the School to spend on current needs.

Expenses Like his predecessors, Nohria carefully managed the School’s expenses, believing that disciplined expense management was essential to the operation of HBS. A detail of expenses from Fiscal 2009 through 2012 is shown in Exhibit 10.

Salaries and benefits were the largest portion of the School’s expenses, comprising $241 million in Fiscal 2012, or 48% of total expenses. Of this total, faculty headcount was 232 full-time equivalents in 2012. Faculty salaries typically grew between 2%–3% annually. In recent years, deans at HBS had begun to hear occasional complaints that faculty salaries at the School were lower than those at other leading business schools. Nohria wondered whether one of the ways to keep the School competitive in attracting and retaining the best faculty was to try and secure research fellowships for assistant professors and endowed chairs for associate professors, supplementing the chairs the School was fortunate to have for most of its tenured faculty. Obtaining such endowment funds would also free up resources for other uses.

Staff expenses had been kept basically flat because overall staff headcount at the School had only risen from 1,146 at year-end Fiscal 2008 to 1,198 at year-end Fiscal 2012 (see Exhibit 11). Although HBS had a higher staff to faculty ratio than its peers, the scale and quality of the School’s staff was widely viewed as a source of competitive advantage: the staff provided leverage to the faculty and


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also ensured that every aspect of the School was carefully managed and delivered the highest quality experience to its relevant constituency, be it faculty, students, or alumni. The importance of the staff had become evident in the vital role they played in executing and bringing to fruition the new FIELD course and the i-lab. If some of the senior-most staff leadership positions could be endowed, Nohria felt it would be a great way to recognize their talents and contributions.

One of the most important and rapidly increasing expenses at the School was in the area of information technology. This area faced constantly increasing and ever changing demands (for example, the rapid proliferation in the number and type of mobile devices that members of the community wanted supported). Major hardware and software upgrades were also required, as was the need to constantly develop innovative new software applications. In 2012 alone, the School had decided to invest in a major new alumni database system that would enable it to maintain richer ongoing relationships with its alumni. In the same vein, it was investing in a more sophisticated system to better manage relationships with its executive education clients and students. All these expenses, both ongoing costs and the more lumpy costs associated with new systems, totaling more than $54 million in Fiscal 2012, had to be supported through the operating surplus. Yet, falling behind on IT investments was not an option; it was essential to the continued success of the School.

Direct and indirect research funding was another important expense. HBS used internal funding to support faculty research rather than requiring faculty members to apply for external grants from agencies like the NSF. This internal funding model allowed faculty members to do research that was distinctive to the School (such as writing cases or pursuing ambitious multi-year projects) rather than molding their research to fit the dictates and tastes of external agencies and their reviewers. On average, faculty members received about $60,000 annually to support their research. They could use these funds to hire research associates, procure data, and travel to write new cases, papers, books, and blogs. Every faculty member also had a third of faculty assistant’s time and a $5,000 flexible spending account to use as they deemed fit. In addition, they had access to several centralized research services such as a case writing group, the Christensen Center for Teaching and Learning, a research computing center, and a lab for experimental research. Many faculty members had joined School-wide research initiatives in areas such as social enterprise, healthcare, and business and environment initiative. Each of these initiatives had an annual budget of between $500,000 and $2 million. The total research budget to fund all these activities was $109 million in Fiscal 2012. In addition to seeking support from the School’s alumni, Nohria wanted to explore the possibility of approaching foundations whose missions were aligned with the intellectual interests of the faculty.

Equally vital to the intellectual life of the School, with an annual budget of $9 million, was Baker Library, perhaps the premier business library in the world, with an extensive collection of historical and contemporary materials. The library’s leadership had developed an impressive vision for Baker 2.04 to fully reflect its role in the new information age.

To support the increasingly global nature of business activity, HBS had invested in creating several global centers that enabled faculty research, student field projects, and executive education in different regions across the world. This network of seven research centers cost about $10 million annually.

A final element of the School’s infrastructure that had always been one of its most treasured assets was its physical campus on Soldiers Field, which created a unique residential and learning community. The School had been long committed to the regular maintenance and upkeep of the

4 Baker 2.0 was the School’s digital library—a twenty-first century academic library that relied on data and information management architecture, a technology infrastructure, and user interface.


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campus, which cost more than $25 million in Fiscal 2012. When new buildings were built, donors were asked to provide at least 50% of the funds, and the remainder was drawn from the School’s reserves.

The School’s expense management philosophy had a few important cornerstones:

Base budgets were tightly scrutinized in a disciplined annual process run by Melnick and Angela Crispi (MBA 1990), the School’s Associate Dean for Administration and Senior Executive Officer. Headcount requests were tightly monitored and controlled even though many of the School’s teaching and administrative units had requested more rapid expansion. Approximately $25 million was reserved from excess cash flow for building maintenance and renewal, to prevent costly deferred maintenance.

The School used little or no financial leverage, and HBS leadership steadfastly adhered to funding expenses out of donations and internal cash flow. This approach had proven highly beneficial during the recent economic downturn.

Implications of Business Model

Nohria had discussed the implications of this model with Crispi, Melnick, and several of his key leaders, as well as with the Campaign Working Group. Based on their analysis of the revenues, expenses, the endowment, and potential growth by activity as well as their understanding of the future needs of the School, they had collectively made the following observations:

1. Discretionary projects, experiments and new innovation had to be funded annually out of the current operating budget. If HBS needed to generate an annual surplus of at least $25 million to fund building maintenance (depreciation level), the School needed to generate incremental cash flow above and beyond that level to spend on new innovation. For example, if the estimated “cash flow from operations” for Fiscal 2012 was $40 million, only $15 million was left to fund incremental experimentation and new projects.

2. Of the major sources of revenues, increasing the amount of unrestricted current use giving was the most realistic way to increase the amount of discretionary funds. The School was unlikely to materially increase its executive education surpluses until more physical capacity was created. In addition, the School was reluctant to increase MBA tuition. It was probably unrealistic to expect materially higher HBP profitability due to competitive dynamics in the publishing business. Future endowment returns were inherently uncertain due to the challenges of the investment environment.

3. For these reasons, Nohria and his team needed to increase the amount of flexible funding in order to do more innovation and experimentation. This was critical to the future of the School and the continued enhancement of its business model.

Fundraising at HBS

Organization

Fundraising at Harvard Business School was coordinated through its Development Office, a significant part of the 90-staff-member HBS External Relations (ER) department. The mission of ER was to foster communication with alumni about the work of HBS, to provide alumni with multiple


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touch points with the School and each other to reinforce the powerful role of the HBS network, and to provide a strong and effective case for philanthropy in support of the School’s priorities. Alumni were engaged through various communications, career and professional development opportunities, alumni clubs and associations, volunteer roles, and events such as spring and fall reunions. In addition to Development, ER comprised Alumni Relations, Alumni Marketing and Communications, and Business Operations and Technology, overseen by Executive Director of External Relations Ralph James, MBA 1982 (see Exhibit 12 for ER organization chart).

Unlike most universities that supported separate annual funds and major gift efforts, the HBS Development Office was not organized functionally by gift type. Building on HBS’s strong history of class fundraising, a generational cohort-based structural model was adopted in 2006 to more effectively cultivate, solicit, and steward alumni. As of June 30, 2012, the Development Office was organized into three cohort-based teams, each staffed by 7-10 development officers and support staff pursuing class-based (reunions and annual solicitations) and individual (major gifts) fundraising strategies. Team A included MBA students and alumni during the first 17 years after graduation (Class Gift, 5th, 10th, and 15th Reunions) and focused on participation and philanthropic education. Team B was comprised of classes 18-37 years out (20th, 25th, 30th, and 35th Reunions) and focused on developing the School’s future leaders and the acquisition/retention of donors in their prime earning years. Team C included classes more than 38 years after graduation (40th, 45th, 50th, and 55th Reunions) with an emphasis on legacy and stewardship. Each of these teams had approximately 14,000 MBA alumni in their portfolios.

Within the teams, frontline fundraising officers were divided into class officers who focused on reunions and participation goals, and major gift officers who worked with individuals to secure larger gifts ($250,000 and higher) for specific purposes. Class officers had a portfolio of five to six MBA classes, with responsibility for setting and executing annual and reunion fundraising strategies, coordinating solicitations, and managing volunteers. Major gift officers, on the other hand, were responsible for the qualification, cultivation, solicitation and stewardship of approximately 200 to 250 major donors and prospects capable of making gifts six-figures and higher. Major gift officers tended to operate on a longer time horizon than class officers, who focused on annual gift and reunion cycles.

Also embedded in the teams were committed development officers working with international alumni. While participation numbers from alumni living internationally were comparatively low, they had been the source of some significant gifts in the School’s recent history. Working across teams were two principal gift officers charged with securing gifts of $5 million and more for capital and other significant initiatives. In addition, two gift planning officers were tasked with assisting alumni with estate planning and worked to secure bequests, gifts of alternative assets, and trust arrangements. James saw gift planning as a growth opportunity that would play an important role in the upcoming campaign, estimating that as much as 25% of new gifts and pledges could come in the form of planned gifts.

HBS’s class-based fundraising was the natural outgrowth of the MBA student experience. The fundraising volunteer structure was built around class and section connections and ramped up during reunions. The reunion-based model was volunteer-intensive with large committees of 50–100 classmates soliciting other classmates for gifts of all ranges: from participation gifts, to planned gifts, to multi-million dollar major gifts. During a reunion year, class fundraising results typically increased both in total dollars and participation. In James’s experience, alumni leadership was an important factor, with the right one to three people as reunion chairs making the difference between success and mediocrity. The downside to this model was that participation between reunions (particularly the first-year post-reunion) often declined. In other words, many alumni—and volunteers—were accustomed


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to making philanthropic gifts and receiving attention once every five years timed with reunions and motivated by personal outreach from volunteers and connections with classmates.

Recent Results

The HBS Development Office had been successful at raising support for the School. In Fiscal 2012, a record $129 million in new gifts and pledges was raised from more than 12,000 donors. MBA alumni participation was 27%, down from 29% at the end of the last campaign in 2005, but still high by graduate school standards (see Exhibit 13 for recent fundraising results). One of the major goals of the upcoming capital campaign was to substantially improve this participation rate—particularly among younger alumni. Annually, approximately 75% of gifts were less than $1,000 with a median gift of $200. Nominal additional support came from friends, foundations and corporations.

Just as important as new gifts and pledges was the annual gift/pledge-related cash flow of $68 million in Fiscal 2012. Made up of cash gifts, pledge payments, and realized planned gifts, “cash-in” was the funding available on an annual basis to fund operations and reserve for unfunded obligations arising from construction of new buildings such as Tata Hall (see Exhibit 14 for details on cash received from gifts).

Implications for the Future

After the successful conclusion of the School’s first capital campaign with George F. Baker’s $5 million gift in 1924, Harvard Business School did not embark on a comprehensive fundraising campaign until the turn of the twenty-first century. Between 2001 and 2005, the School returned to formal “campaign” mode for the first time in almost a century. The campaign raised nearly $600 million for key priorities: financial aid, faculty support, global impact and outreach, educational innovation, and facilities.

By 2012, the minimum gift to establish an endowment fund was $250,000 (MBA Fellowship), with professorships priced at $7 million. Gift opportunities were directly driven by the School’s long-range strategic plan and the dean’s priorities. The Development Office worked in close collaboration with Rick Melnick and the Financial Office to ensure that every gift accepted—particularly those that were endowed—matched the School’s needs and provided enough latitude to spend fully in the present and the future. On a few occasions, this discipline had meant that HBS would redirect a donor to another part of Harvard or to a different institution if their philanthropic interests were not a good fit with the work of the School.

Despite these successes, the funding of innovation continued to be a challenge. Less than 12% of the endowment was unrestricted and just a few endowment funds were directed toward innovation. In rare cases, such as John Whitehead’s support to launch the Social Enterprise Initiative or the launch of a new Global Research Center, large current-use gifts were raised to test a concept. Usually, however, current use unrestricted gifts, generally known as the “Dean’s Fund,” were the main source of such funding.

With the adoption of the cohort-based model in 2006, the School established the “Dean’s Fund” to underscore the connection between general, annual, unrestricted fundraising and the dean’s highest priorities (see Exhibit 15 for marketing materials on the Dean’s Fund). In Fiscal 2012, $18.8 million was raised from donors for the Dean’s Fund, including more than 90% of 9,017 gifts under $1,000 (totaling approximately $1.5 million). Despite this progress, the School was finding it difficult to increase unrestricted giving. The issue had particular urgency because of Nohria’s requested goal of $21 million in Fiscal 2013 to help advance critical initiatives and provide seed capital for new ideas.


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In the summer of 2012, the School was in the midst of planning for its second comprehensive campaign in a decade—a $1 billion effort that would be part of a larger University-wide campaign. Nohria wanted the upcoming campaign to do more than just raise needed funds. He wanted to use it as a galvanizing event to inspire the next generation of HBS leaders, dramatically improve the engagement of alumni, and clearly articulate the role of HBS and business in the world. He saw the campaign as an incredible opportunity to strengthen HBS and the University for decades to come.

Where to Go from Here

As he headed over to the meeting with the CWG, Nohria resolved to seek their advice on how he should explain the need for more flexible funding. The stakes were high: he believed the School needed to raise its current level of unrestricted giving to $30 million per year within the next five years to fund innovation in pedagogy, thought leadership, and university-wide initiatives. This level assumed that new initiatives, such as FIELD, would ultimately attract more permanent/restricted funding once they had been proven. Hence, this level of unrestricted funding was intended to fund the “bridge” phase of innovation.

Nohria and James had carefully studied the fundraising performance of competitors (see Exhibit 16 for selected peer school statistics). They felt that, unlike some undergraduate institutions, business schools generally struggled to raise unrestricted funds. However, they did observe that the HBS participation statistics lagged those of certain other peer schools (particularly Tuck and Stanford GSB).

To address these issues and achieve other goals, HBS had created a Campaign Working Group and subdivided this group into specific task groups aimed at dramatically improving the School’s performance in preparation for the upcoming campaign. Related to the issue of flexible funding, a subgroup had been established and was led by Paul Finnegan (MBA 1982). Nohria and James had outlined several potential initiatives to discuss with this working group at their Fall 2012 meeting:

The School needed to do a better job explaining the business model to alumni and better explain the connection between flexible funding and a greater level of research and development. Nohria knew that many donors believed that the School had immense financial flexibility and incorrectly assumed that the dean had substantial resources to fund research and development. Nohria also realized that he needed to do a much better job explaining why innovation and experimentation were so essential to the future of the School.

What “proof pieces” could be created in the form of brochures, videos, or other materials that could support and reinforce the case for flexible funding as it related to innovation (see Exhibit 17)?

School leaders and development officers needed to more regularly ask for a portion of large gifts to be dedicated to unrestricted funds. This might only be 5% or 10% of each gift but, even at that level, it would have a meaningful impact on the School’s financial flexibility.

Should the School consider making a more “mass” appeal to solicit regular annual gifts to the Dean’s Fund? This effort could be critical to increasing the participation rate among young alumni as well as increasing the amount of flexible funding. Another idea was to assign a frontline fundraiser to focus on donors at the “middle of the pyramid.” Gifts in the $2,500 to $25,000 range were typically unrestricted and brought in more than $10 million in Fiscal 2011. Nohria wondered whether more regional speaking engagements and events (in conjunction with HBS clubs) might be a crucial element of these efforts.


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Should the School create a “corporate associates” program? One or more frontline fundraisers could be assigned to solicit companies globally to contribute to a fund that supported experimentation and innovation at HBS. Individual gifts would be between $25,000 and $100,000 and companies would receive recognition for their participation. This program would potentially tap another source of flexible funding and might be particularly attractive to those firms who wished to be recognized as fostering innovation at the School.

These were among the many ideas and options that Nohria was mulling over as he made his way to the meeting with alumni. Nohria knew that he and his team would have to do a dramatically better job in explaining the HBS business model and why flexible funding was essential to greater innovation. He saw this as one of the most critical challenges of his deanship. He was looking forward to getting advice from this prominent group of alumni.

Exhibit 1 HBS 5-Year Summary

For the Fiscal Year Ended June 30,

Financial Data (in millions) 2012 2011 2010 2009 2008

Revenues $546 $509 $467 $472 $451

Expenses 504 456 415 438 423

Cash from Operations 42 53 52 34 28

Capital Investments 51 34 14 19 40

Building Debt Outstanding 99 103 112 119 121

Unrestricted Reserves 119 79 99 96 79

Endowment 2,665 2,779 2,311 2,117 2,971

Total Assets $3,490 $3,528 $3,087 $2,826 $3,684

MBA Program

Applications 8,963 9,134 9,524 9,093 8,661

Percent Admitted 13% 12% 11% 12% 12%

Yield 90% 90% 89% 89% 91%

Enrollment 1,805 1,860 1,864 1,809 1,796

Tuition $51,200 $48,600 $46,150 $43,800 $41,900

Average Fellowship Aid per Student $29,843 $26,745 $23,989 $24,393 $21,591

Doctoral Programs

Applications 868 830 931 798 595

Percent Admitted 4% 5% 4% 4% 6%

Yield 68% 68% 69% 69% 81%

Enrollment 137 132 125 120 105

Executive Education

Enrollment 9,891 9,939 8,670 8,291 9,345

Faculty

Faculty Positions (full-time equivalents) 232 217 218 228 219

Teaching Materials 640 635 538 608 647

Research Articles 184 150 155 146 152

Books 23 18 29 20 24

Staff

Staff Positions (full-time equivalents) 1,198 1,138 1,087 1,187 1,146


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Publishing

Cases Sold 10,603,000 9,764,000 9,668,000 8,334,000 8,240,000

Harvard Business Press Books Sold 1,580,000 1,665,000 1,769,000 1,478,000 2,025,000

HBR Circulation 256,000 241,000 236,000 237,000 246,000

HBR Reprints Sold 3,355,000 3,098,000 2,946,000 2,863,000 3,123,000

Source: HBS Annual Report.


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Exhibit 2 HBS MBA Curriculum in 2011–2012

REQUIRED CURRICULUM ELECTIVE CURRICULUM— Representative Heavily Subscribed Courses

Finance I

Financial Reporting and Control

Leadership and Organizational Behavior

Marketing

Technology and Operations Management

Business, Government and the International

Economy

Strategy

The Entrepreneurial Manager

Field Immersion Experiences for Leadership

Development

Finance II

Leadership and Corporate Accountability

Negotiation

Authentic Leadership Development

Building and Sustaining a Successful Enterprise

Entrepreneurial Finance

Managing, Organizing & Negotiating for Value

Entrepreneurial Management in a Turnaround

Environment

Institutions, Macroeconomics and the Global

Economy

Real Property

Business Analysis and Valuation Using Financial

Statements

Corporate Financial Management

Source: HBS.


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Exhibit 3 FIELD Overview

Source: HBS


18

Exhibit 4 Map of HBS Global Research Centers

Source: HBS.


19

Exhibit 5 i-lab Overview

Source: HBS.


20

Exhibit 6 HBS Statement of Activity and Cash Flows

For the Fiscal Year Ended June 30, 2012 2011 2010

Revenues (in millions):

MBA Tuition & Fees $99 $96 $92

Executive Education Tuition 142 132 113

Publishing 165 152 135

Endowment Distribution 109 100 101

Unrestricted Current Use Gifts 19 17 13

Housing, Rents, & Other 11 11 11

Interest Income 1 1 2

Total Revenues $546 $509 $467

Expenses:

Salaries & Benefits $241 $219 $203

Publishing & Printing 59 55 51

Space & Occupancy 47 44 41

Supplies & Equipment 10 10 9

Professional Services 35 31 22

Fellowships 37 36 35

University Assessments 17 15 15

Debt Service 6 7 7

Other Expenses 52 39 32

Total Expenses $504 $456 $415

Cash from Operations $42 $53 $52

Use of Endowment Gifts or Appreciation 24 18 13

Cash Before Capital Activities $66 $71 $65

Capital Expenses $(51) $(34) $(14)

Use of Gifts for Capital Projects 17 3 3

Net Capital Expenses $(34) $(31) $(11)

New Borrowings $0 $0 $0

Debt Principal Payments (4) (9) (7)

Other Activity 12 (51) (44)

Net Debt & Other $8 $(60) $(51)

Change in Unrestricted Reserves $40 $(20) $3

Beginning Balance, Unrestricted Reserves $79 $99 $96

Ending Balance, Unrestricted Reserves $119 $79 $99



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Exhibit 7 HBS Consolidated Balance Sheet

For the Fiscal Year Ended June 30, 2012 2011 2010

Assets (in millions):

Cash $26 $18 $10

Unrestricted Reserves 119 79 99

Publishing 165 152 135

Receivables, Loans, & Other Assets 222 214 235

Invested Funds:

Endowment Investments 2,485 2,569 2,154

Current Fund Investments 42 66 35

Interest in Trusts Held by Others 138 144 122

Facilities, Net of Accumulated Depreciation 458 438 432

Total Assets $3,490 $3,528 $3,087

Liabilities:

Deposits, Advances, & Other $53 $44 $45

Deferred Revenue 65 62 59

Other Debt Owed to University 23 28 26

Building Debt 99 103 112

Total Liabilities $240 $237 $242

Composition of Net Assets:

Unrestricted Reserves $119 $79 $99

Undistributed Income & Other 5 8 8

Pledge Balances 92 80 97

Student Loan Funds 10 10 10

Investment in Facilities 359 335 320

Endowment & Other Invested Funds 2,665 2,779 2,311

Total Assets Net of Liabilities $3,250 $3,291 $2,845

The Statement of Activity & Cash Flows presents a managerial view of Harvard Business School operations focused primarily on cash available for use. 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 and would include depreciation expense, yielding income from operations of $49 million in fiscal 2011. Cash flows, however, would be equivalent under GAAP.



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Exhibit 8 HBS Endowment Components Fiscal 2012

Source: Harvard Management Company.

Exhibit 9 Harvard University Endowment Returns vs. Trust Universe Comparison Service (TUCS) as of June 30, 2012

Source: Harvard Management Company.

12.5%

21.1%19.2%

16.7%

23.0%

8.6%

(27.3)%

11.0%

21.4%

(0.05)%4.0%

16.2%

10.5% 10.8%

17.7%

(4.4)%

(18.2)%

13.3%

(13.5)%

12.6%

19.5%

6.7%

(30%)

(20%)

(10%)

0%

10%

20%

30%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Harvard Management Corp

TUCS

S&P 500 / CITI US BIG


23

Exhibit 10 Revenue, Expenses and Net Contribution FY08–FY11 Actuals (in US$ millions)

FY09 A FY10 A FY11 A FY12 A

Other revenue 347 353 392 418

Endowment distribution 113 101 100 109

Unrestricted, current use gifts 12 13 17 19

Total Revenues 472 467 509 546

Salaries and benefits 212 203 219 241

Professional services 31 22 31 35

Printing and publishing 52 51 55 59

Supplies and equipment 12 9 10 10

Space and occupancy 42 41 44 47

Fellowships 33 35 36 37

Debt service 6 7 7 6

University assessments 13 15 15 17

Other expense 37 32 39 52

Total Expenses 438 415 456 504

Cash from operations 34 52 53 42

Depreciation 23 23 24 25

Total Cash Gifts 37 59 89 68

Source: HBS.

Exhibit 11 HBS Staff FTE Summary

Source: HBS.

1,116 1,066

1,017 1,044

1,077 1,109

1,146 1,187

1,087 1,138

1,198

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


24


25

Exhibit 12 HBS External Relations Organization Chart and FTE Count

Source: HBS.

Exhibit 13 Total Cash, New Gifts and Pledges, Current-Use Gifts, and Expenses FY00–FY12

Source: HBS.

412-150

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Exhibit 13 HBS External Relations Organization Chart and FTE Count

ExternalRelations(90)

Development(48)Support

FrontlineFundraising

Teams

PlannedGiving

DonorRelations

Research

AlumniRelations(16)Engagement

Reunions

Clubs&Associations

Careers&ProfessionalDevelopment

Events

AlumniMarketing&Communications

(16)Communications

AlumniCommunications

DevelopmentCommunications

Web/SocialMedia

Print/Production

BusinessOperations&Technology(10)

Infrastructure

Finance&HR

GiftProcessing

AlumniInformation

Systems

ERTechnology


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Exhibit 14 Total Cash Received from Gifts: Detail

Source: HBS.


27

Exhibit 15 Dean’s Fund Materials

Source: HBS.


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Exhibit 16 Peer Business Schools Fundraising Results, Fiscal 2011

Peer Institutions

Overall

Cash

Unrestricted

Current Use Cash

Full Time MBA Alumni

Solicitable Base

Participation

Rate

Columbia Business School* $50,220,000 $4,620,000 35,722 14%

Duke Fuqua School of Business $7,380,000 $2,650,000 9,649 24%

Harvard Business School $89,000,000 $16,700,000 42,169 27%

Kellogg School, Northwestern

University $31,100,000 $4,260,000 23,383 19%

Stanford Graduate School of

Business* $152,400,000 $13,200,000 15,737 42%

Tuck School at Dartmouth $12,700,000 $5,700,000 8,576 71%

University of Chicago Booth School

of Business $19,300,000 $5,200,000 23,068 18%

Wharton School, University of

Pennsylvania* $83,000,000 $9,100,000 37,540 19%

Source: HBS.

*Business schools engaged in active capital campaigns. Stanford University’s $6.2B campaign concluded in December 2011. The University of Pennsylvania’s $3.7B campaign concluded in December 2012. Columbia University’s $5 billion campaign will conclude in December 2013.


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Exhibit 17 Dean’s Innovation Funds At-A-Glance

Source: HBS.

harvard business school: investing in innovation · professor robert steven kaplan and independent...

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