TUESDAY, JULY 27, 2010

The ROI of an MBA

In the last couple of weeks I've met with students at ISB, Great Lakes, ICFAI Business
School Hyderabad and IIM Indore. And the one concern which unites students across one
year and two year programs is the burden of the EMI.

The average ISB student will be paying an EMI of 25k over 7 years, an IIM student 25k over
5 years (going for the exchange program could jack that up by another 4-5k per month).
So the concern students have is: "What will be my ROI?"

The way in which a bschooler calculates ROI is very direct: compare what I spent on the
course, with the placement salary at the time of exit. In case you have significant work
experience, also factor in one year of 'lost income'.

OK. By this method of calculation, the ROI - for a majority of students - will be negative.

The published figure for average domestic salary at ISB last year is Rs 16.47 lakhs p.a.
(CTC).

The fees for this batch were approximately Rs 19 lakhs, while the average incoming salary
was Rs 8 lakhs p.a.

Do the math and you can see that there is much heartburn. Especially for the 50% of the
batch which must - necessarily - bag a job lower than the 'average'.

The same holds true for an ICFAI Business School graduates, where fees + living expenses
for the course would works out to Rs 9-10 lakhs.

The average placement salary would be in the range of Rs 5-6 lakhs. A large % of
candidates are freshers or with 1-2 years of work ex so we can discount the income loss
component.

Now let us examine the case at IIM Indore. The average salary for the class of 2010 was Rs
10.29 lakhs.
The cost of the 2 year course for this batch was approximately Rs 8 lakhs.

Of course, 50% of the batch would have bagged jobs in the Rs 6-10 lakhs range but prima
facie IIM seems to provide maximum chances of a high ROI.

However. As they say with mutual fund investments, past performance may not be
indicative of future returns. So students who are considering the MBA today - be warned.

The class of 2010 at IIM Indore consisted of 175 students. That number went up to 235for
the batch of 2011. The class of 2012 is a record 450 students.

No doubt this will affect the average salary figure. (In fact the larger the batch, the more
focus the institute puts on 'quantity' over quality).

Moreover from this year, the cost of attending IIM Indore has also gone up to Rs 10 lakhs.
Making the 'equation' far less favourable.

I can bore you with several more examples but you get the drift.

The origin of this entire mess go back to 2008, when the market was booming. It
appeared that the MBA was a Golden Degree which, like the yellow metal, could only go
up, up and up.

Record placement salaries, record number of jobs - and a relatively low fee structure -
made the MBA a most exciting qualification. The better the bschool brand, the more
excitement, of course.

At this stage two things happened:

1) In April 2008, IIM Ahmedabad more than doubled its fees (from Rs 4.3 lakhs to Rs 11.5
lakhs). Other IIMs followed.

2) At the same time, year on year, IIMs began admitting more students (seats increased
btw 40-100%)
Let me be honest, when IIMA first hiked its fee, I thought it was a good thing. The course
was highly subsidised, there seemed to be no reason for taxpayers to underwrite the
careers of bright students bagging excellent jobs.

What's more, IIMs promised that no one would be denied a seat due to lack of funds.
Education loans were made available to all and also merit scholarships, based on family
income.

But. The consequences of these actions were not limited to IIM students.

In the world of finance the Reserve Bank of India signals changes in rates. Similarly, IIMs
hiking their fees sent a clear signal to the entire bschool industry. Practically every
bschool in India increased its fees by 50-100%.

In a strange and convoluted way, the low fees charged by IIMs kept fees of all bschools
low. Because no one - apart from ISB, with its own unique brand - dared to charge more
than the market leader.

To compound the problem, the market crashed. Jobs disappeared. The class of 2009 saw
the worst of it - higher fees and lower placement salaries. The number of students
appearing for CAT in 2009 also declined - for the first time in years.

So, what does this all boil down to? MBA karna chahiye - ya nahin??

Well, I think the 'Gold Rush' era is over. If you are looking for quick and safe returns, you
will be disappointed.

I do think an MBA will add a lot of value to your career over the long term. By long term I
mean a 10-15 year horizon. But you will begin to see the difference in as little as 3-5
years.

Certain avenues in the corporate world do open up for you, if you have the right
'branding'.

And if you are not from the best known schools you still have the chance to work your
way up the ladder through performance and personality.
40 years of working life lie ahead of most of us, a one or two year program is an
investment whose returns cannot and should not be calculated merely at the end of the
course.

And yes, demand and supply is the inexorable law of Nature. Bschools may well have to
go back to smaller batches and lower fees - to make themselves more attractive.

The other - and tougher way - is to provide such value addition that recruiters are happy
to shell out more to snap up students. A scenario so implausible... the more practical
method would be to hire Leonardo di Caprio.

And let the 'Inception' team loose at one of those CXO Summits where delegates struggle
to stay awake :)

Posted by Rashmi Bansal at 10:41:00 AM