To me the MBA hiring in India seems generally slow and cautious, except at the very top and perhaps at the lower end. In this scenario, I heard that current and prospective students are wondering about return on investment or ROI.
Wow, ROI on education... in India! I did not expect this.
I grew up in a world where education was about educating oneself, not seen as an investment.
More practically, I also found that the models these students are constructing are rather simplistic and in fact plain wrong (E.g. "I paid x so I should get a starting salary of x, otherwise where is the ROI?")
Which led me to think - is this what they learnt about ROI in their MBAs? :-)
So I thought I'd give a US perspective. In the US, the MBA has been a good investment over decades, through many cycles of good times and bad times. So we in India can learn from the models used there.
5 or 10 year payback:
In the US, the ROI is typically calculated OVER FIVE OR TEN YEARS (see the Forbes MBA ROI calculator for example, which in fact you too can use by putting in rupees instead of dollars).
BTW, the average payback period for the MBA in the US is 4.5 years (see this site for more details).
It's personal:
The ROI depends on the individual. This is mainly because it depends on the salary and annual raises the person can expect without an MBA, and the salary and annual raises the same person makes with the MBA (for a thorough treatment of the subject, see this Excel sheet).
The annual raise part is important in India because the shortage of the best-skilled keeps getting more acute year on year (see the IT industry salaries, for example, they rise fastest as a percentage for the most skilled employees, at least for the first few years).
Let us make a simple model, keeping out the effect of taxes and loans, and see how the ROI calculations might fare in India.
Pre-MBA salary:
The first step is to figure how much you would earn without an MBA. Let us take two people - a Mr. Nandan and a Ms. Neeta.
Let's say Nandan does not have a professional degree and no work experience. His English is fairly ordinary. If he did not do an MBA, he would join a BPO. Let us say his starting salary would be Rs. 8,000 a month or Rs. 0.96 lakhs a year, but increasing every year. "Agle saal hi das hazaar ho jayegi," he feels.
Neeta has an engineering degree but no desire or skills with regards to software. Still, she can expect to make Rs. 2 lakhs a year right away and Rs. 3+ lakhs after a couple of years. But she thinks an MBA will help her "polish" her skills and advance her career faster.
Annual raise without an MBA:
As a BPO operator, Nandan's salary does not increase much year after year. Let us say (for the sake of simplicity) that the inflation rate is steady at 10%. Then Nandan's salary may increase by perhaps 20% a year. So in Year 2, he may make about Rs. 10,000 per month. By Year 7, he may make Rs. 24,000/month, which is not bad. But almost half of the true value of that would be eaten away by inflation (in terms of Year 1 rupees).
As an engineer, Neeta's salary is set to increase faster. Let us say that her salary increases at 25% per year without the MBA. By Year 7, she may be at nearly Rs. 65,000/month or almost Rs. 8 lakhs a year, which is a comfortable salary. But again the true value of that would be just a little more than half that at Year 1 rupees, because of inflation.
Salaries without an MBA:
We express the amounts they make both in terms of the cash they receive and the value of that cash in Year 1 terms (which is lower because of inflation).
NANDAN
Year 1: Rs. 0.96 lakhs
Year 2: Rs. 1.15 lakhs (but worth Rs. 1.05 lakhs in Year 1 money)
Year 3: Rs. 1.38 lakhs (but worth Rs. 1.14 lakhs in Year 1 money)
Year 4: Rs. 1.66 lakhs (but worth Rs. 1.25 lakhs in Year 1 money)
Year 5: Rs. 1.99 lakhs (but worth Rs. 1.36 lakhs in Year 1 money)
Year 6: Rs. 2.39 lakhs (but worth Rs. 1.48 lakhs in Year 1 money)
Year 7: Rs. 2.87 lakhs (but worth Rs. 1.62 lakhs in Year 1 money)
NEETA
Year 1: Rs. 2.00 lakhs
Year 2: Rs. 2.50 lakhs (but worth Rs. 2.27 lakhs in Year 1 money)
Year 3: Rs. 3.13 lakhs (but worth Rs. 2.58 lakhs in Year 1 money)
Year 4: Rs. 3.91 lakhs (but worth Rs. 2.93 lakhs in Year 1 money)
Year 5: Rs. 4.88 lakhs (but worth Rs. 3.36 lakhs in Year 1 money)
Year 6: Rs. 6.10 lakhs (but worth Rs. 3.79 lakhs in Year 1 money)
Year 7: Rs. 7.63 lakhs (but worth Rs. 4.31 lakhs in Year 1 money)
Cost of MBA and post MBA salary:
Both Nandan and Neeta go for an MBA to the same school. Let us suppose they pay Rs. 3 lakhs per year as fees. Since they are living in a hostel, let us suppose they spend a few thousand rupees more each year than they would if they were working. Let us say they spend Rs. 1 lakh EXTRA over the two years, after adjusting for internship stipends etc. and what they would have anyway spent otherwise without the MBA.
All MBA grads do not get similar jobs! Some jobs have good initial salary but flat growth paths (as we saw with the BPO example) while some have relatively low starting salaries but aggressive growth paths (a job with Deloitte this year, e.g.!) Also a lot depends on the backgrounds of the students.
So let us take some practical numbers.
Say, Nandan gets a job with a bank at Rs. 2.75 lakhs a year, with a 35% annual raise instead of the 20% he would have gotten at the BPO. Five years after the MBA, his salary is at Rs. 9.13 lakhs, fully three times what he would have gotten at the BPO, but still highly achievable.
Neeta gets a job as a business analyst at Rs. 4.5 lakhs a year, with a 40% annual raise instead of the 25% she would have otherwise gotten. Five years after the MBA, her salary is at Rs. 17 lakhs, more than twice what she would have otherwise made, but again a highly believable number (I think of how much Anishka can expect to make at Nagarro in 2016, given the inflation of 10%).
Salaries and expenditure with an MBA:
So let us recount these "with MBA" numbers again:
NANDAN
Year 1: investment of Rs. 3.50 lakhs
Year 2: investment of Rs. 3.50 lakhs (but worth Rs. 3.18 lakhs in Year 1 money)
Year 3: Rs. 2.75 lakhs (but worth Rs. 2.27 lakhs in Year 1 money)
Year 4: Rs. 3.71 lakhs (but worth Rs. 2.79 lakhs in Year 1 money)
Year 5: Rs. 5.01 lakhs (but worth Rs. 3.42 lakhs in Year 1 money)
Year 6: Rs. 6.76 lakhs (but worth Rs. 4.20 lakhs in Year 1 money)
Year 7: Rs. 9.13 lakhs (but worth Rs. 5.16 lakhs in Year 1 money)
NEETA
Year 1: investment of Rs. 3.50 lakhs
Year 2: investment of Rs. 3.50 lakhs (but worth Rs. 3.18 lakhs in Year 1 money)
Year 3: Rs. 4.50 lakhs (but worth Rs. 3.72 lakhs in Year 1 money)
Year 4: Rs. 6.30 lakhs (but worth Rs. 4.73 lakhs in Year 1 money)
Year 5: Rs. 8.82 lakhs (but worth Rs. 6.02 lakhs in Year 1 money)
Year 6: Rs. 12.35 lakhs (but worth Rs. 7.67 lakhs in Year 1 money)
Year 7: Rs. 17.29 lakhs (but worth Rs. 9.76 lakhs in Year 1 money)
Payback and ROI:
If you compare the without-MBA and with-MBA numbers in Year 1 money, you will see that the MBA has paid for itself in 5 years (use money in Year 1 rupees for accuracy).
Note also: though Nandan graduates with a Rs. 2.75 lakhs job while Neeta graduates with a Rs. 4.5 lakhs job, their payback period is incidentally almost the same - it is about 5 years. This is because Neeta would have done better than Nandan even without the MBA. Nandan's investment is not much worse than Neeta's despite what it appears at first glance!
The calculations also appear to be realistic. I believe that in this market situation, the payback period for an MBA is going to be similar to the typical US payback period, i.e. 5 years. If the market improves in 2012, say, the payback might be faster.
Is ROI/Payback Period even a good metric?
The most significant lesson from this exercise is what the situation looks like in the long term. Without the MBA, Nandan might be making Rs. 24,000 a month in Year 7. With it, he might make Rs. 76,000 a month in Year 7.
Though his payback period is 5 years, should that be a reason not to do the MBA?
Think of Nandan in both cases - Rs. 24,000/month vs. Rs. 76,000/month.
Is this even a choice? Does the 5 year payback reflect the human angle?
Because life does not stop 5 years after the MBA! Most Indian MBA students have at least 35 years of work ahead of them. What on earth does ROI mean in this case?!
Effect of the quality of the MBA:
Let us say that Neeta had a choice - do an MBA from an "El Cheapo" private school with Rs. 3 lakhs as fees, vs. the more serious one with Rs. 6 lakhs as fees. Let us suppose she is so self-motivated that even with the El Cheapo school, she can get a Rs. 4 lakh job instead of the Rs. 4.5 lakhs job and she can get the same kind of annual raises in both cases. She wonders if saving Rs. 3 lakhs in fees is worth it as the final impact on the starting salary is just Rs. 50,000/year.
But the salary difference stays and is compounded in ways mathematics cannot capture. Every little thing you learn in class, how you learn to compete, how the school's brand is perceived - all this is more important. In the long run, the fees are a small component.
THE FINAL LESSON
My father, who brought up four children on a government salary, always says: "Never try to save money when you are buying books."
(And he never did. We children also went to the best schools we could manage to go to. Today, all four of us children are doctors - two of the real kind and two of the "doctor of philosophy" kind. One sister is the director of a cancer institute in the US, another is a neonatologist. My brother is a senior exec at Facebook.)
So to my father's saying, I will add, "Always get the finest education you can afford. To hell with ROI!"
Think ROI and payback period when you are buying a car. :-)
To share this blog on Facebook, click here:
Share
In today's New York Times, David Brooks writes in appreciation of the US Treasury Secretary Timothy Geithner in particular, and of the Obama administration in general. He is praising their pragmatic handling of the economic crisis. You can read the entire article here.
