Battle 3 – IIM Indore v/s IIM Kozhikode – Flagship MBA/PGP programmes at Top Business Schools in India are overpriced (AGAINST)

The Great Indian BSchool Debate – Battle 3

IIM Indore and IIM Kozhikode will fight it out in the third battle of The Great Indian B School Debate. Comments have now been enabled. IIM Indore’s counterpunch has been uploaded.

(Read here for Battle 1IIM Lucknow vs FMS Delhi)

(Read here for Battle 2IIM Ahmedabad vs IIM Bangalore)

Please note that the arguments put forward below cannot be ascribed as the participants’ individual opinions. All arguments put forward are only for the purpose of this debate competition.

The Flagship MBA/PGP programmes at Top Business Schools in India are overpriced

AGAINST the motion : IIM Kozhikode               (Read IIM Indore’s argument FOR the motion)

At the outset, we define some of the key terms in today’s topic. We are restricting ourselves to MBA programmes offered in “the top business schools in India,” by which we mean the IIM’s, ISB, XLRI and the other usual suspects within the top 10-15 ranks. We take “overpriced” to mean that the cost of the MBA programme is high relative to both the future value that one can derive from it and to similar programs offered elsewhere.

Over the next few pages we attempt to remove the possible reasons for such a misconception and provide strong arguments highlighting the fallacy of this topic.

Over the past few years, there has been an explosion in the number of institutions offering MBA certifications in India. These colleges, mostly private and for-profit, have mushroomed all over the country catering to the perceived need of thousands of Indian youngsters. A highly competitive job market coupled with the sheer number of engineering graduates led to an MBA degree being an important point of differentiation. However, this has now evolved from a differentiating factor to a perceived necessity. Consequently, market forces of supply and demand have given a boost to this ‘business of business schools’. These new institutions offer degrees at various price points and have devalued their own importance. Most of the degrees offered are not accredited, and in most cases are not worth ones’ investment in time and money.

We wish to emphasize though that this has nothing to do with the institutions we are concerned with. We simply cannot compare the two groups as they differ wildly in the quality and scope of education and opportunities offered to students. It is thus a common but wrong conclusion to arrive at (namely that the top MBA programs are “overpriced,”) by comparing these. It is important to note that despite the ballooning of such colleges, for potential recruiters, the value of an MBA from one of the top business schools has remained largely unchanged. A cursory look at historical job data for students from these schools will validate this view.

Another common source of this misconception springs from comparing these MBA programmmes to other non-MBA programmes. This is even more laughable as there is simply no basis for such a comparison. Thus, one might look at the costs of a four-year engineering program from the IIT’s to that of a two-year PGP degree from an IIM. At first glance the latter might seem high, but when we consider the fact that we are comparing hypothetical career-determining apples and oranges, and that the MBA is considered essential for holding senior positions of responsibility, it starts to look like a bargain. All too often we have seen firsthand how a fresh MBA starts out at a higher position than a more experienced but non-MBA bachelor’s degree holder. We sincerely hope that our opponents do not succumb to such fallacies and take into account the greater picture before arriving at a conclusion.

We now make a purely mathematical argument highlighting the mismatch which exists between the costs and future benefits of top MBA programs, much to the benefit of students.

Assume a salary of 12 Lakhs at outset of the MBA with an expected annual growth rate of 7% and a working career of 35 years. The cost of the MBA is assumed to be 12 Lakhs. The return on alternate investment opportunity is 10%.

Present Value   = -12,00,000 + 12,00,000/1.1 + 12,00,000*(1.07)/(1.12) + …

=  2,48,00,000

Naturally, the benefits accrued from an MBA far transcend the cost figures mentioned above. Also, in a pure mathematical sense, they highlight the obvious cost advantage of pursuing a management degree in India vis-à-vis abroad.

Finally, for those who are still not completely convinced of a top-ranked Indian MBA program, we look at similar cases from other countries. To make the comparison fair with respect to exchange rates and cost of living allowances, we consider the ratio of the cost of the complete MBA program to the average first-year salary one can reasonably expect to command upon graduation.

MBA Program

Cost

Median Starting Salary

Ratio (lower is better)

Harvard

174,000

120,000

1.45

Columbia

179,000

110,000

1.63

Wharton

186,000

110,000

1.69

Stanford

181,000

117,000

1.55

London (LBS)

100,000

125,000

0.80

INSEAD

150,000

130,000

1.15

Similar comparisons for top Indian B-Schools (exchange rate Rs55.5/$)

IIM Ahmedabad

25,000

30,000

0.83

IIM Bangalore

23,400

28,000

0.83

IIM Calcutta

24,300

30,600

0.79

ISB Hyderabad

30,000

32,400

0.92

Note: All figures for Class of 2011 (in $) from respective college websites

Conclusion

While contemplating the veracity of the argument posed, we also have to keep in mind that the costs for MBA’s abroad are generally 3-10 times higher than those in India. Some of the reasons cited for the disproportionate fees abroad are that they provide a global perspective and also the multi-cultural experience that enables better moulding of future business leaders. As a counter to this, many Indian B-schools have also commenced providing these experiences in the form of foreign exchange programs as well as inducting a more diverse batch of students.

The recent hike in fees in many B-schools in India is in line with the spurt in per capita income of the population and as such, cannot be viewed as an unjustified increase. Considering the exorbitant fees charged by many B-schools abroad, the costs involved in obtaining a similar degree in India, is still a pittance. The brand equity of many of the top notch B-schools in India is becoming a major force in the global arena, especially in the Asia-Pacific region. Keeping in mind, the relatively modest fees these institutes charge, their students can safely claim to have had an excellent deal. The table presented above also highlights the value provided by Indian B-schools who actually give more bang for your buck. In this manner, we conclude our case against the motion.

– Dipto Kar and Jaykrishnan Parameswaran (IIM Kozhikode)

Participant profiles – IIM Kozhikode

A graduate in mathematics and physics, Dipto has worked in the fields of finance and construction. He spent five years in the US where he went to college and subsequently worked. He plays the violin and enjoys reading non-fiction.

A student of  engineering from NIT Surathkal, Jaykrishnan joined IIM right upon graduation. Now in his second year, he will be spending a semester in France as part of the foreign exchange program. He enjoys reading and plays table tennis and football.


Counterpunch

Counterpunch by IIM Indore 

We see that the arguments from our friends on the opposing side have more or less revolved on the ROI issue. Since they have not analyzed any substantial viewpoints from wider aspects, we will address their concerns with ROI first.

1.  The cost of the program cannot be entirely determined based on ROI. In a recession, the fees of a B-school would then have to be lesser, which is laughable. Salaries are predominantly an external-market phenomenon and can vary with Recession, Business Sectors, Government Policies, and so on, and the absurdity of considering a ratio like this with a one-year sample data-set is downright ridiculous.

2. As for the apples-and-oranges, If ROI is the only determinant, with the salaries which are currently offered at the IITs and NITs with Facebook etc recruiting on their campus, no one would really want to do a flagship programme of PGP. The immediate ROI in this case of an IIT/NIT is much higher, and post some 5 years of experience, the person can opt for an executive MBA programme (thus resulting in a proverbial fruit-matching, if you will).

The flagship programme of BSchools is generally preferred within the first 3 years of work experience, and post-5 years, people with an interest to take up senior positions of responsibility, generally prefer the executive MBA programme from the very same top B schools. With valuable industry experience and a certification from the best B schools, market could prefer them even more compared to their PGP counterparts.
So, for the target market (3 years experience and below), these flagship programmes are indeed overpriced.

3. While comparing with foreign schools, the opponents say that the Indian schools offer a bargain. But that cannot be taken in isolation; the market needs to be taken into account. If you look at the B-schools abroad, many mandate a high level of work experience. These are people who have worked and can afford the fees or at least a part of it. In the case of Indian schools, the participants are almost all with little or no work experience and hence have to rely on loans or family funding to pay the fees. From that perspective it is much more expensive to a large section of the target market. The immediate “financial hit” that the fee amount causes to the student is much higher. The current pressing need is to generate “present Cash flows” to pay for the loan; the lure of “future cash flows” comes much later.

4. The foreign B-schools which the opponents have considered have world class faculty, under whom even our best professors have studied. The brand and knowledge premium delivered by these thought -leaders who have published most of the cutting edge research in the field of management, is immense and worth paying for. Of course, the opponent’s argument of ROI has not really taken this into account.

5. It is meaningless to base an argument of the price of an MBA on the ROI offered as a B-school education is supposed to groom future leaders and managers. With that perspective, it is important to understand how much value and learning Indian B-schools provide before pegging a price on it.

6. The opponent’s meaning of ‘overpriced’: We take “overpriced” to mean that the cost of the MBA programme is high relative to both the future value that one can derive from it and to similar programs offered elsewhere.

By this judgment, it is obvious that if the cost of the flagship programme were made lesser, they would derive even more value from it. This is precisely what happens if you do not judge the innate value derived from experiencing the flagship programme itself, and just continue to hark upon ROI.

But let’s forget all this for a moment, and humour their core mathematical arguments.

  • A primitive ratio of Cost of MBA program to Median Starting Salary is calculated to illustrate, well, immediate ROI.
  • The Present Value of Future Cash-flows assumes a constant rate of opportunity cost, constant rate of increase in wages. Are these the kind of simplistic models one would use to determine pricing structures in such a turbulent market scenario?

So, summing it up, the opponent’s premise has been on a wrong argument plank. We do not wish to talk on ROI alone and hence we have presented a broader picture. Now that the mythical ROI beast has been put to rest, we could take this debate to the next level.

 

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Comments

8 comments

Kunal

Kozhikode – How does an NPV analysis benefit us here. That the NPV is positive over a lifetime is no justification of a high fee. Look into any education system in the world and into any discipline the lifetime NPV is bound to be positive. Infact even if the fees were 1 crore the NPV would still be positive. Does it mean the fees could be hiked to 1 crore? I firmly believe that cost should be the firm driver behind fees. If the IIMs believe that they need to charge higher because they think it will help them pay their faculty more and retai top professors then bingo – go for it. But we really need to see if this is happening. I don't think it is happening. I understand that higher fees has given the IIMs more autonomy as govt subsidy has come down but people ( and by people I don't mean the participants here) should really file an RTI and find out the expenditure and then how much revenue is being obtained out of the fees. I still feel the IIMs could lower the fees by 20% – an personal opinion though given that i have read one RTi filed which came an IIM some headroom for reduction.
Thanks,
Kunal

Rohit Kumar

By making an argument only looking at ROI, the team from IIM Kozhikode has taken a very myopic view. Comparing ROI vis-a-vis Schools like Harvard etc. is not a great comparison because there is a lot more that BSchools like Harvard and Stanford offer in terms of quality of faculty, network, long term brand value etc.

I am sorry IIM Kozhikode you are on your way out. I'll be shocked if you qualify with this argument. Also, we havent seen your counterpunch yet!

Amit

Against-One of the major flaw of the analysis is they are determining individual returns, not totally wrong but is not it against the over all economic effect. We need to see what value addition these courses do and how they contribute to the economy as a whole, an angle totally overlooked. We do compare with foreign B-schools but do not see the way the education is financed, many a times they are government sponsored and many a times company sponsored, the reason being they look for value addition to the company in particular and the economy in general. But in India its mostly guided by individual ambition, so the comparison does not really make sense.
On the other hand, if we consider the executive MBAs they are more costly, owing to the fact that they make more sense in the value addition to the economy. Probably by charging more the intention is to give better quality facilities to aid the value addition process, which is the service a B-school provides.

Obu

Against : I am making a little radical suggestions but these points are valid I guess….I question the entire concept of Indian B Schools…They are more like placement agencies…remove placements from the Program and ask the students to fight it in the open job market..!! And see how much students would be wiling to pay for the flagship program. And if the courses are market priced and if students can choose and pay lets say from 100 courses offered in IIM's,how much would they be willing to pay? The point I am trying to make is students are forced to pay and its not a democratic process where students determine the value of the course he/she is taking.

Comparing median salaries I don't think is appropriate for the guy with lowest salary still pays the same amount of fees. Making a quantitative return calculation I think is as people said myopic to determine the fees.Also for such a person if ROI is considered, its negative. He forgoes two years of salary, burdened with 7 years of loan and after EMI will definitely be getting lesser than if he had continued with his earlier job. So MBA from India is not for short term gain at all.For a few, the returns are huge, but not for all for at-least a decade.

Saurabh

As a former IIM Kozhikode Placements Committee member, I have to say the assumptions taken here are simplistic to the extreme…
With such an exponential increase in batch sizes and no. of IIMs themselves, an average salary of 12 Lakhs(not even getting into the in hand components here) for the thousand or so IIM(and XL, FMS, ISB) grads passing out each year in the current job market is big assumption…

taking into account the rising course fee….which a few years back was not even half of current levels(the salaries haven't doubled since those days)…a student taking an education loan even getting the 12L salary is not at a better lifestyle level compared to his/her pre mba days…someone with an education loan might be paying around 30k+ just for the loan which will last for years…

In simplistic terms…just compare the no. of IIMs, the no. of students in each IIM(and XLRI, FMS etc.) the course fee and the salary levels year on year from 2007 onwards and you can notice there is no rise in salary levels to compensate for the other factors…

My assumptions might be wrong since its been a few years since I passed out and the placement scenario might be back to as good as in PGP10 days..

gaurav

An NPV analysis does not work right because if u look at he cost of living in a city like Mumbai where it is impossible to own a house except somewhere far in the suburbs. You need to look at the NPV in times of high inflation today..!!

1yrmbaprograminindia

A lot of B schools offer only one year MBA programs. Almost all the European MBA programs are one year programs. These programs are designed for people with work-experience, and hence, are compact programs. Often, they do not have the mandatory industry internship. Since these programs have traditionally been one year programs, the curriculum is designed accordingly. As a result, students gain complete benefit out of the program including placement opportunities. Some of the top European B schools which offer only one-year MBA programs areOxford, Cambidge, IE, IESE, INSEAD, etc.

Gaurav

To be precise, the arguments (& counter-arguments) presented by both the sides is at best juvenile with regards to the pedigree of the institutions. These are some glaring flaws:

1. Surprisingly, nobody pointed out the obvious flaw in the NPV analysis.
One needs to consider only "incremental gains" due to an MBA degree & not the entire 12L i.e.. a graduate without a B-school degree isn't going to earn Rs. 0/year
Many Graduates reach similar packages (with IIMs) with 2 yrs work experience. (Again these are not any graduates but those worthy of being in IIMs)

2. B-school degree costs tuition fee + opportunity costs of 2 years labor + psychological costs for studying – benefits of Fun….

3. The returns are: Salary + positive externalities to economy (subsidized by Govt.) + returns due to enhanced macro-economic outlook (which leads to promotion to senior mgmt.) + personal growth (personality/ self-esteem/ better marriage prospects? if you will)

So yes, stamping an NPV tag on an MBA degree is not such a meek task.

4. The comparison with foreign B-schools & median salary figures is disappointing.
Its like comparing 2nd rate B-schools with IIMs.

5. we also have to keep in mind that the costs for MBA’s abroad are generally 3-10 times higher than those in India ???
Even by their naive "Ratio" arguments, none of the ratios are even twice.
What about PPP? If we use WHO-2010 figures 1$ = Rs.20 @PPP. That would put their MBA costs in perspective.
(Infact, the salaries of developing countries are fast-approaching their developed counterparts in accordance to the "theory of convergence" of connected economies)

6.. All said, the counter-arguments by IIM-Indore are juvenile.
The contempt & haughtiness, which is easily palpable in their statements, are not those suiting an MBA grad of any lineage.

7. Instead of countering the mathematical arguments by delineating the flaws in the NPV analysis, IIM-Indore chose to resort to tactics of intimidation by calling the opponents arguments "laughable, ridiculous & harking upon". (There's a difference between a GD and a written debate)

8. The only valid point in IIM-Indore's argument was regarding the foreign B-school comparison. The rest of the counter-argument is based on disparaging the opponent's argument without elaborating on their own thoughts.
Also, MBA from abroad becomes more affordable due to the 20-year (under 5% interest) payback period.

9. NO. The executive-PGP program from any B-school (even IIM-A) doesn't carry as much weight as the corresponding PGP program + 4 years work exp. Care to speak to any e-PGP programmer & you'd know.

10. By this judgment, it is obvious that if the cost of the flagship programme were made lesser, they would derive even more value from it ???
How can price-reduction in isolation enhance value? Value remains constant. Net benefit increases.

11. The counter-argument doesn't present a "broad-picture" (as claimed) at all. The envy of Facebook packages at NIT/IITs & regret of PGP program is evident in the counter-argument.

Now you should ask me, "what's my stand?"

It's simple:
1. Taking the macro-economic view in mind, these MBA degrees are highly over-priced considering the incremental value the nation would derive by enhancing indigenous skill-sets.
Greater managerial talent (along with general Human resource talent) assists private & public policies, national development, better governance, inflow of FDI & FII & other positive externalities that benefit the country as a whole. Hence, the govt. should cap these fees as they are fairly over-charged (Premium market charges even for hostel & IT facilities).

2. From an individual perspective, the degree is neither over-priced nor under-priced. It is the fallacy of the students to exhibit a herd-mentality & follow their friends into an MBA program without any concrete objective or fore-thought. Even an NPV analysis has no relevance for complex heuristic decisions.

So, if the market is behaving irrationally & you don't have reasons enough to be in a B-school Campus, you most likely shouldn't be.
Still if you find yourself in such an unholy mess, stop crying over spilled milk & make the most outta an unenviable situation!
^
And That's how a sensible argument is made.