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 :)


  1. Great precise article. I've been trying to convince one of my friends that doing an MBA is not just about current fees but also about what you will get back, plus the learning. All this feels right once one has faced problems in work front. Your article gives a clear picture of the. Great piece! Btw read both your books! Great reads, very very inspiring!!

  2. Great article Rashmi - very insightful. It will definitely help people contemplating a BSchool degree.

    And like you said - I think the long term needs to be taken into account rather than exit salary.

    Finally - I think a similar analysis would hold true for pepole considering Masters in technical field - whether M.Tech at IITs or MS abroad.

  3. This is the absolute truth. ROI should be calculated keeping those 40yrs in mind.

  4. Great post. Perhaps this is pointing to self study regimens using some principles of social learning, study groups, and open courseware.

    I am doing a little experiment in social learning, though it is not for an MBA. Rather I am doing a Masters in Computer Science, using open courseware, and social learning (credentials). If it seems interesting, do check it out at - http://opencs.wikidot.com

  5. @Rashmi: "Especially for the 50% of the batch which must - necessarily - bag a job lower than the 'average'."
    This is not logically correct!! If Rs. X is the average salary of the batch, it doesn't mean that 50% of the batch gets less than Rs. X! That would be true only if Rs. X is the MEDIAN salary of tha batch.

  6. You write a great insightful blog for all an MBA Students, this blog helps those many students think that if we spend too much money on study, they would get good job. By this your post, they get to know what reality is. I am one of those students. I can understand many things in your blog post. Thank you for your valuable insight.

  7. What I conclude from your article is that under present circumstances MBA may not seem to fetch a good RoI (or it may even give negative RoI for that matter), but in the long run, MBA degree holders are bound to get benefited. In nutshell, it is worth to do an MBA even under present circumstances if RoI is viewed over a relatively long horizon.

  8. To add another point, one must also take into account the growth as well as quality-of-work aspects in the pre-MBA career one has (to calculate the opportunity cost; although it is very difficult to quantify). Only considering the pre-MBA salary may not yield a fair picture.
    I feel many of the MBAs (including the top-notch ones) in India do non-MBA jobs (which are or were manned by grads/engineers) just because they have nothing better to do, thanks to the increasing batch strengths everywhere. Corporate world can absorb only so much of management grads in management roles in the true sense. Rest of them may take up pseudo-technical roles (analytics, IT and Financial services KPOs).

  9. u r great mam..loved the article

  10. Another way to look at return on investment is to calculate the pay back period (PBP).

    For example, let's say my current salary is Rs. 5 Lacs and I need to invest an additional Rs. 10 Lacs to get an MBA. So the total investment in the program (including foregone earnings) is Rs. 20 Lacs over two years. If I was able to get a job for Rs. 10 Lacs after the MBA (thus doubling my pre-MBA salary) then the marginal value addition due to MBA is Rs. 5 Lacs per year. Holding constant everything else (and ignoring interest), this means I'll be able to recoup my investment in about four years.

    So the question is, am I willing to make an investment that I can recover in four years and which leads to a (arguably) better job profile and permanently elevated earnings stream for the next 30 years or more.

  11. Doesn't it sound illogical ,

    I mean larger batch size should reduce fees - even if we consider higher managing costs !! ,

  12. a thumbrule in many countries/institutes internationally for cost of education is the same as annual salary.

    clearly in india both for mba/engg edu...this ratio has gotten adverse in the past few years. therefore if the funding of edu is based on repayable loans. then there is a serious case for destabilisation of the higher edu scenario.

    some thots/actions at policy are pertinent. leaving it purely to mkt dynamics - wd lead to chaos like the sub-prime bubble...[if not of the same magnitude financially, but similar impact societally]

  13. Good article.

    Brought to light stuff which I often wondered.


  14. Master piece Rashmi. This will definitely help students made up their minds to think a little different while they are pursuing or about to pursue higher studies. This reminds me of one line from the movie 3 idiots where Aamir Khan Says "Seek excellence.Success will follow you."

    Anyways but, this will definitely help even me as i am planning to study further in "Project Management" after 3 years of starting my career as a Software Engineer.

  15. great article. :)

    to all who commented :

    but if its only about learning and the degree, then what do you all think about part time MBA's and executive ones. They are more cost effective.


  16. Good analysis and I agree with you... The return on investments has considerably lowered or may be the time to recover the investment has increased substantially. Its a vicious circle... I liked your concluding part! :)

  17. nice info for a student like me. thanx.

  18. Great article Rashmi - very insightful. It will definitely help people contemplating a BSchool degree.

  19. So many spam comments. Rashmi you should do something about it.

  20. really liked this article.. never thought of it when I did my MBA 9 years back..
    I did the calculation for ROI and I am happy to say that I covered my cost in 2.5 years after completing MBA!!!

  21. I still the IIM's have an edge year particularly with most of the 1 year MBA's from IIM's having a lower fee structure and higher average salaries.

    Still unable to find any decent comparison between ISB and the 1 year MBA's of IIM.

  22. if you consider ROI as bench mark, then university campuses and small towin MBA colleges comes first.normally an mba here costs around 2lacs (including living and tutions fees,) and they agerage salary of any of these guys be around 15000 (no tax Dedcuted).the pay back perion would genarally be 15 months. and Loan repamyent be donae any way befor the 50th month of employment.

    here is my 2cents

  23. Good. Keep it up. From http://www.deccansojourn.com

  24. Nice write up ..... what i want to say this is that there is a sort of misconception that MBA is all aout money .. as u have pointed out in your article, MBA is not only about money ... there is lot of value addition as well. and as for ROI u are totally correct that the best in best have PATHETIC ROI. I would just like to highlight here that MBA from IITs is on the contrary quite economical. though the average salary is not comparable to IIMs but ROI goes to as high as 400%. I am currently pursuing my MBA @ IIT K and my total fee for 2 years is less than 2 Lacs (which includes the food charges as well) while the average slary ranges from 7-9 lacs. and to add to that ...... Life at any IIT is unforgettable.

  25. Appreciation for the topic!
    Rashmi ji it`s really true that now MBA days are over coz the kind of ROI we were getting before slowdown are over. There are thousands of business school which are doing nice buisness. Charging 5 to 6 lakh fee and not able to placed 30 student out of 150 is the story of alomst every 2nd tier b- school, including Symbiosis, Amity business, iipm, icfai etc

  26. Well indeed it is one of the main factor for most of the aspirants. But there are colleges that outscore all others in this like FMS with a fees of 30 + boarding and lodging it gives you avg sal of abt 14 lakhs similarly IIT Delhi for an investment of 2 lakhs gives you avg of about 12 lakhs.

    So IIMs aren't the benchmark as far as this factor is concerned.

  27. A very good article I have read on MBA in recent times.

    I completed my Engineering with 58% (well electronics is not my cup of tea) in 2009 and MBA is my dream degree.

    My chances of getting admit in a good bschool got narrowed with this academic performance ;)

    Why aren't people looking at the 'knowledge' they actually gain over the time spent at IIMs learning stuff?

    If the ultimate goal is to earn decent money and get better ROI statistics, I have planB ready.

    1. Invest 10-15L now in mutual funds. Carefully choose the options.
    2. It doubles in 3 years.

    launch a product, a statup, hire the best people possible, pay them pea nuts (markets crashed. right?) and make money.
    Can there be any better ROI than this? Even, skip the investment part, be in the business now - 2years ahead and capture the market.

    - The ultimate goal is to gain practical exposure and work on the industry needs. Not the dream of fat checks.
    For those who say why not get into part time or executive MBAs, show me a decent MBA degree via online or correspondence that match with the excellence of IIMs minus the absurd fee and I'm in :D

  28. I think a similar analysis would hold true for pepole considering Masters in technical field - whether M.Tech at IITs or MS abroad.

  29. I think a similar analysis would hold true for pepole considering Masters in technical field - whether M.Tech at IITs or MS abroad.

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  31. great article....totally an eye opener...but...i feel that if ur heart lies in what u do ,then money should not come in betweem...ultimately u should enjoy the job ...money should be the next priority...ofcourse large sum is invested but if u truly feel that u are in managing things...u enjoy the challange in it then u must go for MBA

  32. Ashvin rajai said...
    very good and insigtfull artilcle madam
    presently i am doing mba in rajkot ,in gtu affiliated college,
    the ROI concept which is applicable in business undertaking you applied it on to the professional course MBA which one has to taken care while choosing MBA as one of his career option so it would really helpful to all fresh graduates wish to acqire MBA as a career Option,i personally calculate my possible ROI which helps me to improve my personality and skill . in a nutshell investment in a MBA study is a mere to a great investment but subject to condition apply


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