CRISIL YOUNG THOUGHT LEADER

CRISIL YOUNG THOUGHT LEADER COST BENEFIT ANALYSIS OF DOING AN MBA BY ANAMIKA CHAUDHARY IIMK KOZHIKODE (2013-2015) 1

Contents EXECUTIVE SUMMARY... 3 INTRODUCTION... 4 PRIMARY DATA ANALYSIS... 5 SECONDARY DATA ANALYSIS... 8 CRITICISMS AGAINST AN MBA COSTS OF DOING AN MBA... 8 TUITION FEE... 8 OPPORTUNITY COSTS AND LOSS OF COMPANY BENEFITS... 9 COST OF LIVING... 9 OTHER FINANCIAL COSTS... 9 NON-FINANCIAL COSTS... 10 BENEFITS OF DOING AN MBA... 10 NEW CAREER PATHWAYS... 10 SALARY INCREASE... 11 BUSINESS NETWORK... 12 OTHER FINANCIAL BENEFITS... 13 NON-FINANCIAL BENEFITS... 13 CONCLUSION... 13 WORKS CITED... 14 2

EXECUTIVE SUMMARY The very prestigious degree of MBA is under criticism for almost a decade now. The Business schools including the top ones are being criticized for charging huge fees but often offering low returns and long payback periods. However this report starts with a neutral stake to explore and weigh the various costs against the benefits provided by a management school. According to the analysis of the primary and secondary data available and author s personal views, this report establishes that the management education in B-schools which are accredited is still worth doing. The first section deals with primary data analysis of costs and benefits identified with the help of survey of 80 students across different management schools. Though there are significant financial costs like tuition fee and opportunity costs along with non-financial costs like high stress level which is highly prevalent in top B-schools, the benefits outweigh them. These benefits include both financial and non-financial benefits like career pathways, salary hikes, business networks, knowledge, confidence and personality building. The secondary data (encompassing different affiliated management schools all over the world) studied in the second section of the report also reveals the fact that an MBA degree offers you different career pathways in all possible sectors. The costs are not only compensated with the benefits provided but also through different scholarships. The report contends that both financial and non-financial benefits offset the costs of doing an MBA. An MBA degree from an accredited institution helps the students in not only choosing an ambitious and secure career path but also give their personality an edge over the others. [Summary: 264 words] [Report: 2191 words] 3

INTRODUCTION Management has been one of the most sought after and prestigious degrees since its inception in 1872 when Lyon Chamber of Commerce and Industry established the first B-school called EMLYON business school in France. Subsequently, the till date well known colleges like Tuck School of Business (1900), Harvard Business School (1908), Kellogg School of Management (1908), MIT Sloan (1914), Columbia Business School (1916), Stanford Graduate School of Business (1925) and many more were established. In India, this revolution came in later half of the 20 th century when Indian Institute of Management, Ahmedabad came in 1961. While the management education was growing gradually, towards the last decade of 20 th century, globalization, liberalization of economies, expansion of service sector and development of information technologies led to a spurt in the demand for MBA professionals and so did in the number of B-schools. Worldwide, there are 15,673 business schools affiliated to AACSB and in India itself there are 3900 management colleges that are approved by AICTE. Apart from these, there are a number of private colleges that are not affiliated to any such board. 1200 No. of B-Schools added, India 1000 800 600 847 744 682 1017 400 304 200 9 14 58 118 0 1950 1960 1970 1980 1990 2000 2010 Source: AICTE Annual Report 2006 Even though there is a spurt in the number of seats offered for MBA, there is a huge criticism going on against the management education particularly since Jeffrey Pfeffer and Christina Fong published their 2002 article The end of business schools? Less Success than meets the Eye questioning the value of MBA. Once upon a time it used to be a no brainer. If you manage to get an MBA, you did it and came out on the other side with a license to pick a job of your choice and print money. Earlier cost-benefit analysis, return on investment and payback periods were taught when you get into an MBA while students nowadays are learning these even before to calculate their own break-even point. 4

Taking an example from India, even though the number of seats at IIMs is continuously increasing, the number of CAT applicants touched a 7-year low of 1.95lakhs in 2013 marking a nearly 33% comedown from a high of 2.9lakhs in 2008. Anindya Sen, dean (academic) at IIM Calcutta says "There was a time when it was all about the craze for an MBA degree. Now that is changing." Total number of CAT applicants 350000 300000 250000 200000 150000 100000 50000 0 2006 2008 2010 2012 2014 2016 Total number of seats at IIM 4000 3000 2000 1000 0 2009 2010 2011 2012 2013 2014 2015 There is lesser charm for MBA degree now as it used to be. In such circumstances only the elite colleges prosper. According to the survey conducted by Financial Times on business education, 2014, enrollments on the top 100 MBA programmes (worldwide) fell slightly in 2013 while the enrollments on the top 10 programmes rose 1% to almost 6000 (accounting for almost a third of enrolments on the top 100 programmes). Thus the question awaits an answer: In the current scenario is it really worth spending huge money to write these three letters on resume? What are the benefits of doing an MBA? PRIMARY DATA ANALYSIS With the help of a research paper, A holistic framework for the perceived return on investment in an MBA by T. Carmichael and M. Sutherland, University of Witwatersrand, March 2005, the various costs and benefits of an MBA college were studied and a survey was designed based on those. This survey had 80 students of final year MBA in different management schools (after the final placements) as respondents wherein they were required to rank the given costs and benefits (financial and non-financial) and then also answer whether they think the benefits of their doing an MBA outweigh the costs. The responses were analyzed and average ranking was calculated for each. Following graphs show the key results of the survey: 5

Average ranking of Financial Costs 7 6 5 4 3 2 1 0 Tuition Fees Financial opportunity cost Loss of company benefits Cost of living Text Books International travel Stationery Average ranking of Non-financial costs 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 high stress level Reduced worklife balance relationship deterioration non financial opportunity cost loss of business networks loss of self confidence Average ranking of financial benefits 7 6 5 4 3 2 1 0 6

Average ranking of non-financial benefits 8 7 6 5 4 3 2 1 0 No benefit 2% Financial Vs Non-financial benefits Financial Vs Non-financial costs Non- Financial Costs 6% Non- Financial benefits 38% Financial benefits 60% Financial Costs 94% Do you think the benefits from your MBA outweigh the costs you incurred? No 25% Yes 75% Thus the students doing MBA understand the importance of the unique skills that this degree instills. Along with financial benefits there are many non-financial benefits which no other degree provides in the current scenario. 7

SECONDARY DATA ANALYSIS CRITICISMS AGAINST AN MBA COSTS OF DOING AN MBA TUITION FEE Business schools aren t cheap. The tuition fees for B-schools globally or locally are increasing at a galloping rate even after the economic crisis. Every year Trends in College Pricing reports on the changes in tuition and fee prices at colleges across US. The report (2013) which includes data from College Board s Annual Survey of Colleges reveals the continuous increase in the average tuition, room and board fee from 1973 to 2013 Average Tuition, Room and Board Fee, U.S. $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 1970 1980 1990 2000 2010 2020 Public Two-Year Public Four-Year For India, according to Economic Times article (September 28, 2013), in many of the older IIMs, fees have gone up by three to four times from 2007-09. But there are many elite colleges that offer large amounts of financial aids and grants. According to Bloomberg Business week survey, 2013, Harvard Business School with an overall world ranking of 2 charges the highest program cost of $126,576. But at the same time, it grants up to $ 29,843 as scholarship. 8

Scholarships and program costs average scholarship amount average program cost resident 66061 126576 90410 95900 94548 53124 117930 118020 32384 29843 28296 26677 25734 24294 23847 23683 Kenan-Flagler Business School Harvard Mendoza Business College of School Business SOURCE: Business Week Survey, 2013 Darden School of Business Goizueta Business School Kelley School of Business Tuck School of Business Stanford Graduate School of Business OPPORTUNITY COSTS AND LOSS OF COMPANY BENEFITS While the tuition costs of doing an MBA are explicit to everyone, the implicit opportunity cost and losses of company benefits are what matter next to it. This is the money aspirants are giving up to pursue their 2 or more years of MBA degree. While tuition fee is easily measurable, opportunity cost is highly dependable on different factors like age, gender, work experience, citizenship and educational qualifications. But this cost can be offset by the high salaries offered after pursuing an MBA degree. According to the Official GMAT Website, the average MBA graduate of the class of 2011 expects a 55% increase in salary over how much they made before their MBA. COST OF LIVING Cost of living is the next major cost that affects the MBA aspirants. The average total cost is very similar across Europe and the Asia-Pacific region approximately $70,000 in the latter, $67,000 in the UK, and $74,500 in the rest of Europe. However, in the US, where both fees and living costs are higher, the average total cost equates to roughly $99,000 (Financial Times Survey, 2014) OTHER FINANCIAL COSTS Textbooks, international travel and stationery are the other minor costs that add to the tuition fee and opportunity costs. 9

NON-FINANCIAL COSTS Along with these financial costs, there are some non-financial costs also attached to an MBA degree. These include high stress level, reduced work-life balance, relationship deterioration, non-financial opportunity cost, loss of business networks and loss of self confidence. This is not an exhaustive list and may include many other personal costs. BENEFITS OF DOING AN MBA Among the most common long term goals of MBA aspirants is becoming a CEO of a reputed company and one of the most palatable dreams is to be a CEO listed in Fortune 500 list. An analysis of where the CEOs of the Fortune 500 went to school was done by U.S. News & World Report. The study found that the MBA was the most popular degree with the corporate elite. Around 200 out of 500 CEOs had an MBA degree on their resumes. Also, Harvard Business School has four times as many chief executives of Fortune 500 companies than Stanford and three times as many as Wharton. NEW CAREER PATHWAYS New career pathways are something alums feel is most important benefit that a B-school provides. The career success is significant if there are better opportunities in the start itself and that is what an MBA essentially provides. According to a paper on Personal economics by Paul Oyer, Stanford University economist, an individual s salary at his first job has a strong impact on lifetime career earnings. Following graphs of Financial Times Survey 2013 show various job titles and sectors alums of two schools are in: Indian Institute of Management, Ahmedabad (Global Ranking 26) and Boston University School of Management (Global Ranking 95). They clearly show that the MBA degree holders occupy the top positions in business firms like CEOs, board members, director, VP, partners, department heads, senior management or other professionals. They are also employed in diverse sectors showing the wide opportunities for MBA aspirants after holding the degree. The MBA pass-outs occupy the middle and top level management in the industry. 10

Boston University School of Management Indian Institute of Management, Ahmedabad SALARY INCREASE The second most important benefit is increase in salary. According to Financial Times Global MBA Ranking 2012, Stanford Graduate School of Business offers 129% salary increase, Harvard School of Business 122% and Indian Institute of Management, Ahmedabad 140% (the top three colleges on the basis of weighted salary). Considering that these are the elite colleges and everyone doesn t get admission here, GMAC 2012 Global Management Education Graduate Survey provides numbers for programs overall and not merely the top ranked business schools. 11

Source: GMAC 2012 Global Management Education Graduate Survey This graph shows that the MBA degree does provide huge salary increases for all affiliated colleges and not only the elite ones. One of the most striking findings from GMAT data shows that students who attend lower ranking schools experience a better ROI (18%) than those who attend higher ranking schools (12%). This can be attributed to the extremely costs that a student pays in high ranking schools. Source: GMAC 2012 Global Management Education Graduate Survey BUSINESS NETWORK MBA schools are known for their alumni network. These alumni not only help students in choosing the right career path but also provide recommends and job opportunities. According to Businessweek research 2013, HBS has 77,778 alumni. In 2011-12 academic year, 42% of Darden s living alumni contributed to the placements. 12

OTHER FINANCIAL BENEFITS Not only these, an MBA degree on the resume assures employability, increase in company benefits, promotions at a higher rate, improved industry mobility and other earnings NON-FINANCIAL BENEFITS Along with all these financial benefits, an MBA degree brings with itself many intangible benefits that complement the actual financial benefits. These include increased knowledge, better quality of life, increased skills, self-confidence, wisdom, insight, greater productivity, improved social relationships, job satisfaction, sense of values and ethics and even new close relationships. CONCLUSION The debate on benefits perceived and actual benefits received has been going on for the last few years. Even though the placement scenario might not paint a very rosy picture of MBA colleges in the recent times, the MBA degree retains its significance. The reason for that actually lies in simple concept of demand and supply. Because of recession, the rate of increase in demand has slowed down while the supply of MBAs hasn t. However, this paper does not argue in favor of the colleges that are private and do not have any accreditations or affiliations. This report establishes that once people graduate with these three letters on their resume, they jump into a new labor market. Management education provides a wide range of opportunities and business networking contrary to any other degree. No other degree in the present scenario can contest the wholesome know-how that a B-school provides. Because of its unique feature of huge diversity taking students from engineering, medical, arts, commerce, and many other fields along with the combination of freshers and experienced students, the MBA degree brings out the best in a person by challenging their abilities. An MBA is not a degree- rather it is an experience. It is a simulation of the real corporate world; the only difference being students can commit mistakes here and learn from them. Thus unless another post-graduate degree providing such experience and knowledge is introduced, the future of an MBA degree remains illuminated. 13

WORKS CITED Jeffrey Pfeffer and Christina T. Fong (September 2002), Volume 1, The End of Business Schools?Less Success Than Meets the Eye, Academy of Management Learning & Education Global MBA Ranking (January 27 2014), Financial Times Survey, Financial Times business education T. Carmichael and M. Sutherland (March 2005), A holistic framework for the perceived return on investment in an MBA, Graduate School of Business Administration, University of the Witwatersrand Aarelli A Cambridge (2012), QS Global 200 Business Schools Report, MBA Wharton BusinessWeek (October 21, 2002), An MBA: Is it still worth it? Special Reports:The best B-schools Shweta and Manoj Kumar (July-December 2011), Management Education in India: Issues & Challenges, Journal of Management & Public Policy, Vol. 3, No. 1, p 5-14 Adam Palin (January 30, 2012), Value for Money?, Financial Times Business Education Sreeradha D Basu & Shreya Biswas (Sep 28, 2013), Economic slump: Number of CAT aspirants at seven-year low; MBA degree falls from grace, ET Bureau, The Economic Times Joel Peterson (May 14, 2013), The $200,000 Question: To Get an MBA or Not? Chairman, JetBlue Airways, Stanford Business School, Linkedin.com Relationship between Pre-MBA Work Experience and Post-MBA Career Outcomes (December 2002) Research in Higher Education: p727-744. Brooks C. Holtom and Edward J. Inderrieden (February 2007), Investment Advice: GO for the MBA Bloomberg Business Week Survey, 2014, BusinesssWeek 14