HBS: long-term value proposition with a short-term operating model

Summary

HBS creates enormous value in the global economy by equipping generations of leaders with the knowledge and perspective to “make in difference in the world.”  However, for a business model that theoretically creates wide-ranging impact across the globe, HBS’s operating model is remarkably fixated on relatively short-term transactions.

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What is the true value created by HBS?

The measure of alignment between business and operating models is entirely dependent on how the value ultimately created is defined.  Fellow classmate, David (1), who also wrote about HBS pointed to the IP/education/brand as inherently valuable – a view that is probably more correct and one that many at this academic institution doubtlessly share.  But the overly optimistic side of me sees these as simply vehicles that ultimately drive true economic value by effecting change in organizations throughout the world.

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For a sense of scale, a leaked survey of the class of 1986 revealed 36% of graduates founded a company that ultimately had 25 employees or more. (2)  At an average value of $10M, this small piece is almost $4B in value created by less than a third of the class every year.  Adding in the much broader impact of the executive-ed and publishing/research activities probably puts the total value created at somewhere in the range of $10-$100B every year depending on how much of the created value you attribute to HBS.

Capturing that value

With this broader definition of value creation, HBS fails miserably at capturing any significant part of it.  In 2014 HBS generated ~$600M in revenue, primarily through publishing ($200M), Executive Education ($160M), the MBA program ($120M), and the endowment ($120M+) (3).  As a non-profit institution however, this is not inherently a bad thing.  The issue arises when the method of value capture drives a misalignment between the operating model and the actual value created.

Misalignment between the value created and operating model

In the case of HBS, because the value is captured largely through short educational programs, the vast majority of its assets are focused exclusively on the programs themselves rather than long-term support, likely limiting the potential value creation.

HBS’s operating model includes four critical assets, most of which are largely dedicated to creating a transformational educational experience in the Exec-ed and MBA programs:

• HBS faculty are likely the hardest to measure components of the operating model.
• The HBS brand is critical for attracting top quality faculty and students
• The campus itself is a valuable asset. Spangler hall alone is 122,000 square feet (4) which puts the value of that asset somewhere in the $30-50M range based on Allston/Cambridge real estate prices (5).  Grossing that up to the campus as a whole probably puts the total value in the neighborhood of $1B – $500M.
• The HBS endowment funds a significant portion of the operating budget at a current value of ~$3B (6).

Each of these components are largely focused on the academic MBA & exec-ed programs whose graduates in turn eventually create significant value around the world.  If the ultimate goal is to equip leaders to make a difference in organizations across the world, are short degree granting programs the most effective use of billions of dollars of assets and a world renowned faculty and brand?

A more aligned alternative

Creating a more aligned model should begin with a better alignment between the value created and value captured by HBS.  Imagine if a student enrolling in an HBS program dedicated 2% of their future annual income (extremely rough proxy for value created) as a continuous “tuition fee” throughout their entire career.  With 40 years of MBA graduates in the workforce at any given time, earning on average $350k, (7) this would provide $280M in annual budget – more than the current MBA & Exec-ed programs combined generate each year.  While nowhere near perfect (the LEAD memoirs relentlessly assured us that the vast majority of value created is not reflected in a person’s salary), this model would at least force a long-term perspective on the ultimate value created by its graduates.

Given this new value capture lens, the myopic focus on the 2-year experience starts to feel inefficient.  Maybe moving to a 1-year MBA program and subsequently making 50% of assets currently dedicated to MBA program available to graduates throughout their career would affect more long-term value?  The HBx initiative is an interesting and important step in this direction, but the current resources dedicated are a paltry 2% of the total budget (8).

HBS likes to espouse the broader perspective it endows each of their students with; maybe it’s time HBS expanded their own perspective to a more aligned operating model.

Sources:

• David Snee, RC TOM: https://d3.harvard.edu/platform-rctom/submission/hbs-harvard-business-school/
• Poets & Quants: http://poetsandquants.com/2012/06/15/25-years-later-class-portrait-of-the-lives-of-harvard-mbas/
• HBS Annual Report: http://www.hbs.edu/about/annualreport/2014/Documents/HBS-Annual-Statements-2014.pdf
• HBS website: http://www.hbs.edu/about/campus-and-culture/campus-built-on-philanthropy/Pages/spangler-center.aspx
• Trulia Market Trends: http://www.trulia.com/real_estate/Cambridge-Massachusetts/market-trends/
• HBS Annual Report: http://www.hbs.edu/about/annualreport/2014/Documents/HBS-Annual-Statements-2014.pdf
• Poets & Quants: http://poetsandquants.com/2012/06/15/25-years-later-class-portrait-of-the-lives-of-harvard-mbas/
• HBS Annual Report: http://www.hbs.edu/about/annualreport/2014/Documents/HBS-Annual-Statements-2014.pdf