Does a Mid-career Full-time 1-year MBA have a Negative Financial RoI?

Everyone experiences mid-career blues in her career. And one way people (who didn't enter the corporate world with an MBA degree) think they overcome these blues is to get an MBA degree.

Mid-career MBA Dilemma

Since we are talking about a business management course here it is worth assessing whether it makes business sense to get a business degree. What is the likely RoI (return on investment) of an MBA? Does a mid-career full-time 1-year MBA have a negative financial RoI?

Case of Mrs. X - Should She Do an MBA or Not

Let's consider a certain Mrs. X entered the corporate world when she was 25 year old and plans to retire when she turns 55 (hence the career would span for 30 years). After working for 10 years Mrs. X decides to do a 1-year full-time MBA. The big question would be: Does a mid-career full-time 1-year MBA have a negative financial RoI?

Let's assume a few things:
  • Mrs. X will work for 20 years post-MBA
  • The cost of MBA is Rs. 2600000 (26 lacs)
    • It is also assumed that Mrs. X has this readily available in cash and will not be needing an education loan. If an education loan in considered the financial RoI is negatively impacted
  • If the MBA Cost is kept in a bank FD (Fixed Deposit) it can earn post-tax returns at 6% interest rate compounded annually
    • It is also assumed that this money lies in the FD throughout and earns interest on compounded basis year after year
  • The current salary of Mrs. X is Rs. 2400000 (24 lacs)
  • Mrs. X expects to earn 8% salary hike every year
    • It is also assumed the %hike will remain same before and after MBA. The reason is that an MBA can't change the inherent competencies and performance level of an individual. An MBA can help get a one-time major salary hike but the future hikes will depend on the person (and an MBA program can't change a person at a fundamental level).
  •  Mrs. X expects to get a one time 50% hike
Given the above scenario what is the likely answer to the question: Does a mid-career full-time 1-year MBA have a negative financial RoI? One might think it can't be a "yes" but an insightful analysis reveals that it is actually yes. See the table below for the details of calculations.



And here's the chart showing the trend of Money W/O MBA, Money W/ MBA and Net INCOME. It clearly shows the returns over a 20 year period is always negative and in fact, keeps getting worse year on year.


So does a mid-career full-time 1-year MBA have a negative financial RoI? The answer is yes. The financial RoI of doing a mid-career full-time 1 year MBA is actually negative. Thus going by purely financial RoI perspective Mrs. X should not do an MBA.

Reasons Other than RoI for Doing or Not Doing an MBA

Though Mrs. X realizes that the financial RoI of doing a mid-career full-time 1 year MBA is actually negative there are still many other reasons she can go ahead with the MBA. Here are some reasons why MBA may have RoI in other aspects (non-financial in nature):
  • Get break into an area one always wanted to work but couldn't. An MBA degree can open certain doors that were closed before
  • Feel good about oneself by virtue of the esteem value generated in flaunting the MBA degree. An MBA degree is a great label to have on one's resume, any day
In the process of the benefits that might accrue to one certain things might get lost. Here are some of those:
  • Technical or functional competency before MBA may count for little or nothing. Also the grass always looks greener on the other side. One might get an MBA and realize that she was comfortable and enjoyed a role with more technical content as compared to a role with more managerial content
  • One would always have the disadvantage over someone who entered the corporate world with an MBA degree. An MBA degree with 10 years experience after that is not equivalent to an MBA degree with 10 years experience before that

Fake Leadership versus Genuine Leadership

Organizations need leaders, genuine leaders and not the fake ones, to attract and retain the right talent. This becomes all the more important in organizations that are started by a few individuals. Such organizations need to hire senior professionals to help grow the organization. These professionals hired from outside can easily determine whether the existing leadership is fake or genuine. Fake leadership as against genuine leadership is evident when the leadership team doesn't walk the talk.
 
Signs of Fake Leadership

Here are some usual signs of fake leadership:
  • The top man in the organization, MD or CEO tells the senior professional hired from outside that an initiative must be completed by a certain date no matter what, despite repeating umpteen times that no short-cuts should be taken. The rationale is that challenges are part of any initiative or project and must be managed. And the message is sent across indirectly through an artificially created reporting structure.
  • The MD or CEO doesn't allow senior professionals hired from outside to grow in the real sense. These professionals are made to report into the MD or CEO through an artificially created reporting structure.
  • The MD or CEO takes arbitrary decision without taking the senior professional hired from outside into confidence. The attempt is to show that the artificially created reporting structure is adding value when in reality that may not be the case at all. This in some way is a justification to legitimize the artificially created reporting structure
  • The MD or CEO has pre-conceived and  strong opinions and is not willing to consider differing thoughts. In some ways she would take the decisions on her own and then fake discussions with the senior professional hired from outside to give an air of genuineness to the whole affair.
  • The MD or CEO talks about empowerment but doesn't allow true empowerment to the senior professional hired from outside. These professionals don't share the accountability with the artificially created reporting structure if things go wrong but are made to share the successes with the artificially created reporting structure if things go right.
  • The MD or CEO talks big about motivation and recognitions but fails to duly appreciate and recognize any big achievement of of senior professionals hired from outside. In fact the success of senior professionals hired from outside is completely diluted by giving a "run of the mill" award to something significant and special. The fake leadership becomes all the more evident when this is done through the artificially created reporting structure.
Handling Fake Leadership for Senior Professionals

The senior professionals hired from outside should not remain long with an organization if they realize the leadership is not genuine but fake and that their growth is artificially contained by the skewed organization structure. Hence the "Importance of Appropriate Reporting Structure". This is generally one major reason "Why New Hires May Quit Early On!"

Is Gurgaon Dwarka Expressway a Bubble Ready to Burst?

After reading about Gurgaon Dwarka Expressway a lot in the newspapers, I decided to explore the Gurgaon Dwarka Expressway area to find out the answers to certain questions in my mind:
  • Does it make sense to buy a house in Gurgaon Dwarka Expressway area?
  • Is it worth putting one's money in buying a house in Gurgaon Dwarka Expressway area ?
  • Are many people really buying houses in the Gurgaon Dwarka Expressway area?
So is Gurgaon Dwarka Expressway a bubble ready to burst? The answer at this point seems to be a big yes. Just read on.
    Gurgaon Dwarka Expressway Area

    For getting answers to the above questions I spent the last few weeks driving through the new sectors on the Gurgaon side of the Gurgaon Dwarka Expressway area to understand its layout. The whole of Gurgaon Dwarka Expressway area can be divided into five parts:
    1. Area close to Delhi (Sector 109, Sector 112) - these are being sold with the USP of close proximity to IGI Airport and Dwarka
    2. Area opposite to Palam Vihar on the other side of the Delhi-Rewari railway line (Sector 102, Sector 103) - these are located close to Rajendra Park
    3. Area opposite to Sector 9 and 10 (Sector 37C, Sector 37D) - these are close to Basai  area
    4. Sectors on the right side of NH8 when going to Jaipur from the Kherki Daula Toll Plaza (Sector 84, Sector 89, Sector 90) - these are running close to the road going towards Pataudi
    5. Sectors on the left side of NH8 when going to Jaipur from the Kherki Daula Toll Plaza (Sector 79) - these are towards Faridabad side in close vicinity of Aravalli Hills
    Does it Make Sense to Buy a House in Gurgaon Dwarka Expressway Area?

    No, not at all given the rates which are currently being quoted. It appears there are no affordable projects in this area. All projects are claiming to be luxurious and the current BSP rates start from Rs 5000/- to 5500/-. For the high-end projects the target market consists of high net worth individuals for whom a few crores here and there doesn't matter hence the contents of this post may not be fully applicable to this segment.

     It would be fair to say that a normal end-user would want to buy at least a 2 BHK. For a 2 BHK of 1500 sqft the basic cost starts from 75 lacs and after considering the additional charges (EDC, IDC, Parking, Club, PLC, etc.) and stamp duty the cost will easily touch 90 Lacs to 1 crore.

    Surprisingly there are many builders who have come in to "make hay while the sun shines". I came to know about an inverter manufacturer planning to come up with a housing project. There is a possibility that many of these get some bookings done and sell the project lock, stock and barrel to another builder and there is no guarantee the other builder won't do the same. For end user this may mean inordinate delays.

    Is it Worth Putting One's Money in Buying a House in Gurgaon Dwarka Expressway Area?

    No, not at all unless you are an end-user who bought it when the BSP was Rs. 2000/- to 3500/- or purely an investor who has put your money when the rates were even lesser and has enough cash to stay in case resale takes its own sweet time. Or handle the worse possibility - to buy and keep the house in case no resale occurs. With this area this is a very real possibility. We know that when demand goes up prices go up but when prices go up many people who could afford an item earlier drop out leading to demand flattening which again brings prices down.

    For the salaried class who pay taxes to the government honestly at source itself (through TDS) unless one is earning more than 25 lacs in a year buying a house in the Gurgaon Dwarka Expressway area will be next to impossible. For details see the section "Some thoughts for End Users of Housing Projects".

    Are Many People Really Buying Houses in the Gurgaon Dwarka Expressway Area

    No, not at all despite the claims made by the builders and even newspapers and many news channels. In the Gurgaon Dwarka Expressway Area mostly investors have put in their money expecting to make a kill when rates go up. It is a fact that prices can't go up indefinitely (other than to account for inflation factor).

    Imagine an investor with 1 crore who invests in four houses at a rate of X0. The investor would typically follow the strategy as below:
    • Sell the first house when the rate is X1 (>X0) - profit is on the differential X1 - X0
    • Sell the second house when the rate is X2 (>X1) - profit is on the differential X2 - X0
    • Sell the third house when the rate is X3 (>X2) - profit is on the differential X3 - X0
    • Sell the fourth house when the rate is X4 (>X3) - profit is on the differential X4 - X0
    The total profit is expected to be X1 + X2 + X3 + X4 - 4X0. This calculation makes a major assumption that the investor is able to make a resale. Also consider the number of people who can afford the house as N0, N1, N2, N3 and N4 when the rates are X0, X1, X2, X3, X4 and X5 respectively.

    It is obvious to note that: N4 < N3 < N2 < N1 < N0. Now think what if N1, N2, N3 and N4 are close to zero (meaning there is demand but no affordability in the market - people want homes but can't afford if X0 is very high).

    Some thoughts for End Users of Housing Projects

    Imagine an end-user who wants to buy a house. It can be assumed that an end-user will come in only at the rate of X1 or higher. Supposing the end-user has 20 lacs in savings so to buy a 1 crore house she will need a loan of  80 lacs under CLP (Contruction Linked Plan). In any case banks don't fund more than 80% of the total cost. For 80 lacs loan at a rate of interest of 11% the EMI for 20 years comes to Rs 82575/-.

    Now assuming banks are ready to allow EMI upto 50% of her take home salary. This means the end-user should be earning Rs. 165150/- every month which translates to an annual take home salary of around 20 lacs or annual total salary of 25 lacs. What percentage of end-users come in this income bracket? What about the uncertainty due to weak market conditions? What if after taking loan an end-user suffers a job loss?

    So if you are an end-user stay away unless you are prepared for the long haul - spending 1 crore for a 2BHK. The other risk is if the investor can't make a resale the builder won't get the money to carry on with the construction. And even if the builder could, it won't because there is demand but no affordability in the market so no buying would occur until prices crash and that makes the project commercially nonviable.

    End-users should also not take the risk of becoming an investor to make a quick kill as this can backfire. I suppose investors will be willing to have their money forfeited by the builder than pay more if the resale doesn't occur by a certain time. An end-user turned investor can't afford to have the money forfeited as their money will be hard-earned unlike the case with investors (who generally have lots of unaccounted money).

    Learning from the US Sub-prime Crisis

    The US sub-prime crisis had its roots in a situation like the growing bubble in the the Gurgaon Dwarka Expressway area. In the case of the US sub-prime crisis housing loans were provided to those who couldn't really afford them.

    Whereas in this case other than projects that were sold when the BSP was Rs. 2000/- to 3500/- most of the projects will stall mid-way  due to defaults by investors (who will stop paying) resulting from lack of end-users (who won't be able to afford the houses). This will naturally lead to inventory pile-up leading to a price crash.

    Those who don't want houses, have them (Investors - for them house is a means to make money) and those who want, can't afford them (End-users - for them house is a means to satisfy the basic need of shelter). We all know no one is able to buy something is equivalent to no one wants to buy it and in that case prices do crash.

    So is Gurgaon Dwarka Expressway a bubble ready to burst? The answer at this point seems to be a big yes. This is highly unfortunate since many needy end-users finally get adversely impacted.

    Online Shopping Experiences

    I purchased few items over the Internet in the last one year - cellphone, corded telephone, printer cartridges, baby products, shirt, shoes and accessories. Here are some observations based on my experiences:
    • Avoid the not so known, unbranded and unreliable websites
      • One of the not so known website I purchased a color cartridge from shipped me a piece where the warranty period was about to get over.
      • Another unbranded website I purchased some baby products shipped me an old milk bottle for infants. Also another item was not as per what I thought it would be. The description on the website was not to mark.
      • Another unreliable website I purchased shirt, shoes and accessories from shipped me a shoe which was not of the quality claimed by the website.
    • Always go with branded websites
      • One of the site I purchased a cellphone and corded telephone each was a good experience. The corded telephone size was slightly lesser what I had thought but rest everything was fine.
      • Another site I purchased a black cartridge from shipped a fresh piece in perfect condition.
    Based on my good experience websites I recommend for online shopping:
    • Flipkart
    • Ebay
    And based on my not so good experience websites I recommend to avoid:
    • Nextworld
    • Yebhi
    • Hushbabies
    These are based on my experiences. However, as they say everyone has different experiences and perspectives.

    Why is Driving on Indian Roads Risky?

    I think one of the hallmarks of good driving is safe driving. Driving on Indian roads, however, is an experience which can be scary. And as one would realize it in no time, it's not safe at all.

    Why is driving on Indian roads risky? Based on my experience here are some observations on this:
    • Diversity of vehicles on the roads -both slow and fast moving vehicles share the road space leading to chaotic conditions
    • Scant respect of lane discipline - drivers change from one to another lane like a "random variable" putting the other road users at grave risk
    • Lack of awareness of traffic rules - drivers don't know many traffic rules
    • Disregard of traffic rules - drivers don't show any consideration for traffic rules
    • Urge to stay ahead of others - drivers carry their egos on the road.

    Cash Comes from Competency, Connection and Chance

    One of the purpose in life is to become successful. In this materialistic world success is generally seen as equivalent to how much cash comes one's way (this is probably true except for certain professions and certain personalities).

    Cash and Competency

    Competency is the ability of a person to perform the activities demanded by a profession in such a manner that the person is seen as the "go to guy". Examples include famous cricketers who could do wonders with the bat or the ball or both.

    Competency allows a person to be able to leverage an opportunity if it comes the person's way. Without competency a person can get an opportunity but fail to make use of it to become successful.

    Cash and Connection

    Connection is the network of people a person has been able to cultivate who can in some manner influence the opportunities that come a person's way. Example includes a promising cricketer getting noticed by the selection committee due to a string of stellar performances.

    Connection allows a person to be considered by those who matter to notice and provide opportunities to the person. Without connection a person with competency also may not get the opportunity.

    Cash and Chance

    Chance is the blessing of an invisible hand that makes a person convert an opportunity to one's advantage. This is where the rubber meets the road and cash comes flowing down to the person's pockets. Example includes a cricketer playing a match where other players under-perform.

    Chance allows a person to capitalize an opportunity that comes the person's way. Without chance a person with competency and connection may fail to leverage the opportunity.

    Cash Comes from Competency, Connection and Chance

    The role of competency, connection and chance is pivotal to success in the form of loads of cash. It can be said that cash comes from competency, connection and chance.

    The timing of connection and chance is important in ensuring cash does indeed come. For example if someone takes the video of a promising cricketer which is watched by the selection committee after twenty years it will certainly do no good for the person.

    Giving Good and Constructive Feedback

    One of the ways to improve any system or process is to get it reviewed by experts and other relevant folks.

    It is important to provide “quality” feedback should one be assigned the responsibility of performing the review.

    Giving good and constructive feedback can go a long way in helping improve the system or process.

    In fact giving feedback is as much an art as it is a science.

    How to give good and constructive feedback?


    Here are some points to consider which might be helpful:

    Know the Background and Context of the Area being Reviewed

    Many a time reviewers don’t know or understand the background and context.

    This might be due to genuine lack of knowledge or the reviewer carrying prejudiced notions.

    It is helpful for reviewers to spend some time to acquire broad understanding of the concerned area(s).

    Do Your Homework before the Review Discussion

    Many a time reviewers do the review during the review meeting.

    This not only slows down the pace of the review meeting but also shows the lack of interest by the reviewer.

    It is helpful for reviewers to spend some time prior to the discussion to run through the items sent for review and identify the opportunities for improvement.

    Get Clarifications before the Review Discussion and, if Appropriate, Share Observations in Advance

    In case certain clarifications are required they can be sought prior to the review discussion.

    This can not only help save time during the review but also ensure that another round of discussion is not needed. 

    It is also a good practice, if appropriate, to share the review observations in advance.

    Maintain Positive Outlook and Communicate Observations in a Constructive Way

    How we say something is equally important as what we say.

    Being positive and constructive in sharing the feedback is helpful to ensure other reviewer(s) and also the author(s) don’t get defensive.

    The review is not to be seen as a forum to score a point but to contribute in improving the system or process under consideration.

    Don’t Shy Away from being the Lone Voice of Dissent

    At times one lone voice of dissent can get drowned if all others agree on something. 

    A good reviewer would facilitate the discussion towards a logical conclusion and consent with others.

    At the same time he will also insist that the dissents are discussed at some length and duly recorded.

    Don’t Maintain Hard Positions

    Reviewers should be open to others viewpoints and thoughts and ready to give up their position if that helps the discussion to progress towards a more meaningful conclusion.

    Positions don’t matter, the end outcome does.