the Swiss people. It was a national

symbol, an icon that embodied the very

quality Switzerland prided itself on

precision, punctuality, service, and

above all, financial property. For

decades, the airline was so financially

solid that it earned the nickname the

flying bank. Generations of Swiss

children received shares of Swiss Air as

gifts. The airline operated as

Switzerland's global ambassador until

October 2001. The collapse began a

decade earlier when Swiss voters

rejected to join the European Union.

Switzerland's vote to stay out of the EU

left Swiss Air locked out of the big

alliances with other airlines. As an

outsider, the airline could only watch

as British Airways, Luansa, Air France,

and KM kept adding flights to their

schedule. Swiss Air's own attempts to

grow independently were hampered by the

EU countries and the airline was

trapped. Too small to compete in its

tiny home market and yet blocked from

the broader EU market. Desperate for a

way in, Swiss Air hired McKenzie.

McKenzie proposed something called a

Hunter strategy. Instead of joining or

forming an alliance, which is an uphill

battle in and of itself, buy minority

stakes in multiple European airlines and

stitch together a network from the

outside. Swiss Air followed the playbook

and spent hundreds of millions to

acquire 49% of Belgium's Sabina as well

as big stakes in Germany's LTU and

several struggling French carriers. And

that plan sounds pretty solid except for

one tiny detail. EU law did not allow a

non-EU airline to take majority control.

So Swiss Air could not truly influence

these airlines that had bought, but it

was still on the hook for their losses.

Sabina's unions blocked cost cuts.

Headcount ballooned and Swiss Air had to

ride off its entire equity stake within

a year. Instead of backing off,

management doubled down because they hit

record profit in 1998. And that was the

apparent validation of McKenzie

strategy. When fuel prices rose and

demand went down, the House of Cards

collapsed. By 2000, Swiss Air posted a

2.9 billion frank loss. And a KPMG

reodit in 2001 showed 17 billion franks

of debt supported by 555 million in

equity, which comes to 30:1 debt to

equity ratio. After 911, with cash

almost gone and banks unwilling to

extend more credit, Swiss Air collapsed

on October 2nd, 2001 and ended the

airlines existence overnight. McKenzie's

Hunter strategy advised Swiss Air to

pursue an expansion model that looked

brilliant in a deck, but was impossible

in reality under EU laws. The

acquisition strategy was framed as the

only way to stay competitive, but never

asked the hard question. Can you

actually control and fix these

struggling airlines if you're legally

barred from owning them? Swiss Air

executed the strategy exactly as advised

and it destroyed them, wiping out about

15 billion Franks and a national icon.

McKenzie, excluded from execution,

walked away with its fees and reputation

largely intact. While Switzerland was

left to ask whether the most prestigious

consultants in the world had effectively

helped kill their flag carrier, today's

episode is about the rise and fall of

corporate consulting and where it's

headed now that AI is part of the

equation. The good, the bad, and the

ugly. Let's dive in.

was basically a well orchestrated

arbitrage. You get a lot of junior

labor. You put them to work at scale and

benefit from a pretty sizable margin.

Yes, consultancies sold their services

as strategic insights and partner level

expertise. But in reality, a lot of it

was marketing lingo. Just like the word

gold in a goldplated jewelry, there is a

professor by the name of David Maester

who formalized a theory that for a

consulting firm to function, it needs to

have a very high margin around 70%. This

70% margin transformed consulting from a

professional service into a labor

arbitrage machine. In a traditional

consulting firm, the hierarchy goes like

this. Analyst, consultant, manager,

principal, and partner. partners make

between$1 and $5 million annually, but

not through their own billing hours.

They make it through what Professor

Maester calls the surplus generated from

nonpartner staff. Once again, partners

make millions selling knowledge and

expertise through the surplus generated

from non-partner staff. In plain

English, this means that I am selling my

partner level knowledge, except I'm not

doing it myself. If you're listening to

this and thinking, "This sounds awfully

familiar, but I can't put a finger on

what it is." Let me help you. It's

called the good old pyramid scheme. A

business where the pyramid is the

business model itself. The underlying

economic model is based on the revenue

per employee metrics. and McKenzie, BCG,

and Bane are strikingly consistent with

it. As of the last two years, revenue

per consultant averages around $430,000

per year. But entry-level business

analysts at McKenzie earn around $120.

That is their base and around $150,000

total, which means that there is a 3x

markup. Now, let's zoom out. What is the

typical staffing structure on a typical

consultant project? You may ask, what do

you mean by typical? Let's say a most

common mid-range project. Now, who are

the biggest consumers of consulting

services? Mid-market enterprises. And

the reason for it is because they have a

unique gap that makes them

hyperdependent on outside resources.

Mid-market enterprises deal with big boy

problems, M&A, market expansion, new

territories. But what they don't have is

the big boy enterprise resources. They

have the budget for consulting firms but

not the budget or time to build their

own in-house expertise. A typical

staffing model for a consulting project

puts one senior partner who dedicates

20% of their time, meaning that they

manage four other clients. One

engagement manager, two consultants, two

analysts over a three-month period. The

staffing depends on the project type and

Professor Maester calls it the leverage

decision. High lever projects put armies

of junior staff at 4 to6x cost multiples

and bring the firm around 70% gross

margins. Low leverage projects are

staffed with senior partners and yes

they cost more to the client but they

also compress margins to about 30 to 40%

for a consultancy which means that the

unit economics of a consulting firm

favors high leverage projects. And this

is why partner compensation derives not

from partners' own billable hours but

from the leverage they have underneath.

A firm with 100 junior consultants, 30

managers, 10 partners achieves 10 to one

leverage and each partner extracts

margin from 10 subordinates underneath.

This structure gave life to a myriad of

cultural artifacts associated with

consulting. client site visits, weakened

slide decks preparations, enormous

stress, and it makes sense because you

have to somehow justify costs that are

blown out of proportion. Junior

consultants would lock thousands of

billable hours to justify their $75 an

hour rate and generate the $300 an hour

margin, which would fund the partner

compensation. To put this in

perspective, you guys know I love

analogies, so let's use one. Let's say I

start a company called Daria's Lemonade

Stand. I make lemonade by squeezing

lemons, adding sugar and water. The cost

to make one cup is 50. I sell each cup

for $5. Profit per cup $4.50.

That is 90% margin. My business model

scales linearly. The more lemonade I

make, the richer I get. Then one day I

wake up and go, what am I, an amateur?

I'm going to make more lemonade stands

and I'm going to sell my lemonade to

restaurants. I hire Maria, my bar

manager. She runs the stand daily. She

trains staff. She handles the quality.

And then I hire Lauren who makes the

lemonade. She would serve customer and

she would restock the cups. Lauren is my

77% margin. And then I hire Jack who

stocks shelves and prepares the lemons.

Now instead of individual cups, I sell

lemonade packages, a continuous supply

of lemonade to offices nearby. And I

finally find my big corporate contract

for $200,000 a month of continuous

lemonade supply. This contract requires

my oversight, Maria managing

communications with offices, Lauren

making lemonade, and Jack preparing the

ingredients. My only major constraint is

people. Lauren could only make so many

cups a month. If I want to scale, I need

to hire more baristas and buy more

lemons. But then I buy an automated

lemonade machine for 50 grand. It

produces the same quality as Lauren or

Jack combined. And it cost me $2 a month

to operate an electricity bill,

hypothetical one, but still. Fulfills

orders 24/7 without any breaks. And

guess what? Now my margin is no longer

77%. It's 99. You may think what a

profitable business. Yes, but it has

limitations. The profitability of the

leverage model depends on maximizing

billable hours. The more hours I put

into a project, the better. The cheaper

the labor, the better. But what this

also means is linear scaling. A partner

could only supervise only 10 to 20

direct reports effectively. And if I

have a larger team of five to seven

people or more, I would have to hire

additional management. This model

generated extraordinary returns for

three decades.

impact of AI on consulting is in

realizing that it disrupts the unit

economics of the consulting business

model. It doesn't even have to fully

automate the work. All it has to do is

to boost a midlevel consultant. But if

it automates fully, it destroys the

margin. And the margin is the reason why

consultancies operate in the first

place. Consulting firms sell insights

but profit from leverage. Remove the

leverage and the economics of a 16

billion dollar McKenzie fully evaporate.

The economics of management rest on a

premise that clients pay premium rates

because the work that consultants

provide requires human expertise

deployed at scale. But this very notion

was proven wrong. Guess by whom? by

McKenzie's very own internal AI platform

called Lily.

July 2023, McKenzie launches Lily, their

internal AI platform trained on 100

years of firm's intellectual property.

Hundreds of thousands of documents,

cases, interview transcripts,

frameworks, and within a year and a

half, 75% of Mackenzie's consultants,

which let me remind you, it's 45,000

people we're talking, are using it

monthly. Once again, 34 of the firm uses

AI as a core research tool, not for

writing emails or summarizing notes. It

serves as an essential tool for

research. And research is what

consulting business sells. Put yourself

in the shoes of a junior consultant. You

got to answer a question like how to get

rid of rats in New York. You break down

the problem. You make it digestible. And

then what? Then you want to know how

similar problems were solved in the

past. Now you work for a major

consultancy and that's exactly what

consultants do. You have the data. You

have the data from the past 100 years.

You have frameworks. You have methods.

You have case studies. You have networks

decks. But you need time to sort through

piles and piles of cases and piles and

piles of data. Here's what used to

happen. When a client sent McKenzie a

request for proposal, a junior

consultant would get assigned to write

it. They would then spend hours or even

days digging through internal knowledge

base trying to figure out whether it has

been done before and what can we learn

from previous cases, how to approach a

problem, what worked and what didn't.

But with Lily, they get a summary of it

right away. They go through precedents,

they find contacts, they find

frameworks, synthesize data, all kinds

of sources with links. And this research

can be done in 3 hours. They would then

prepare for a kickoff call and someone

called an engagement manager would

structure the entire engagement, work

streams, scope, staffing, timelines. All

of this would require two to three days

of planning. With Lily, you get answers

what project structure worked, what

trade-offs you had, resources, and

everything you need to know about

previous cases. You take it, you refine

it, and it's done in less than a day.

And now we get to the legendary part

that defines consulting as an industry,

the decks. And Lily can autogenerate an

entire PowerPoint from prompts. Anyone

who has prepped a deck before knows that

a deck is a lot less about content and a

lot more about moving the freaking

colors and circles around. And sure, we

all have company approved templates, but

let's be honest, half the time

doesn't work. Lily wiped around 20% of a

junior analyst work. research,

synthesis, decreation, client

interaction, and for a 45,000 people

firm, that's about 8,000 full-time

employees eliminated. McKenzie cut 5,000

and the rest got absorbed into higher

level work. And no surprise, when they

did that, they did not lose any revenue,

which in turn proved that the clients

were paying for artificial scarcity.

What's remarkable is the culture shift

within the consultancy itself. It's one

thing when your customer prompts AI

because they're curious if they can do

it cheaper and get the answers quickly.

It's another thing when AI becomes part

of your staff. When you start a meeting

with, "Have you asked Lily?" you're

recognizing that the value is no longer

research. It's what you do with Lily's

output. And therefore, the old

consultant skill set, which is

exhaustive research, becomes obsolete.

The irony is the fact that the business

that sells optimization optimized

itself. When they introduced AI and cut

30% of their own work, they proved that

their own business model was

artificially inflated. So what does this

mean for consulting as an industry? Is

it dead? No, it's not and it won't be.

career in consulting? My good friend

once showed me a meme that illustrates

the consulting industry pretty well in

my opinion. I think the fact that the

market is changing is definitely for the

better, especially for early career

folks because it will no longer create

an illusion of easy money. I've had

experience working and studying with

people whose entire career was built in

consulting. And I formed an impression

that it's a very specific and a very

narrow skill set with low

transferability of skills because you're

locking yourself into working with

companies of a very certain profile and

a certain size. And your entire career

is about dealing with the problems that

happen at that level. But if you're

working in a market with extreme

uncertainty, a market where you need a

wide variety of skills, that doesn't do

you any good. Consulting was once one of

a few elite careers in business that

could land you $100,000 in starting

salary right out of school. But

objectively, a generic skill set should

not cost that much. What we're seeing in

26 is the entry-level hiring collapse.

Consulting job postings are down.

Entry-level consultant hiring plunged

54%. PWC cutting 30% of entry- level

roles by 2028. The infamous and

prestigious by social standards grind is

exactly what gets automated. The career

path is fairly eroded and a 20-year-old

should probably think twice before

entering the field. But on the flip

side, consulting is finally coming back

to what it was always supposed to be, an

elite domain expertise. We hope this was

helpful. Let us know what you think in

the comments. Till next time. Bye.