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The election of 2000 was a defining moment for Los Angeles-based O’Melveny & Myers. While O’Melveny litigators Warren Christopher and Ronald Klain represented Vice President Al Gore in the battle for the White House that year, many partners were focused on the election taking place within the confines of the 116-year-old firm. Five O’Melveny partners campaigned to chair the firm as existing chairman Charles Bender carried out his final term. The candidates delivered stump speeches at O’Melveny’s Los Angeles headquarters and several of its other dozen offices to outline their visions for turning around the 700-lawyer firm. After a decade in which O’Melveny’s financial and organizational limitations had become increasingly apparent, there was no shortage of voices within the firm clamoring for change. “I was concerned about the firm’s stagnation,” says Arthur B. Culvahouse Jr., the corporate lawyer in the Washington, D.C., office who won the election. Two-and-a-half years after Culvahouse was elected chairman, O’Melveny is not so much changed as transformed. The 54-year-old attorney known to colleagues as “A.B.” has refashioned every facet of the firm, from its management to its practice structures. More significantly, he has delivered a windfall of profits. In 2001, O’Melveny’s average profits per partner surged a whopping 34 percent, to $945,000 from $705,000 the year before. Now, as its 2002 fiscal year comes to a close, the firm appears poised to cross the $1 million profits-per-partner line, which would place O’Melveny in an elite tier of firms. The figure represents a comeback for O’Melveny, after an era in which it watched L.A.-based rivals Gibson, Dunn & Crutcher and Latham & Watkins pull ahead financially while its own profits stalled. But it’s also a testimony to just how central the drive for profits has become within the new O’Melveny. “The management was tasked from the start with the almost singular responsibility for turning the profits-per-partner numbers into something that was going to be comparable to what O’Melveny believes are its competitive firms,” says one partner who left the firm more than a year after Culvahouse took over. For Culvahouse, focusing on the bottom line was critical if O’Melveny wanted to remain a top-tier firm. In order to recruit and retain the best attorneys, he insisted, O’Melveny’s profits-per-partner numbers needed to improve. A veteran Washington, D.C., lawyer, Culvahouse served as counsel to President Ronald Reagan and Sen. Howard Baker. Colleagues describe him as friendly and straightforward, yet poised, polished and exceedingly professional. Even on casual Fridays, notes one former O’Melveny attorney, Culvahouse invariably appeared in a suit, tie and suspenders. As chairman, he wasted no time in instilling this discipline and professionalism into the firm’s business operations. Billing rates, which had been allowed to sag — some say as much as 15 to 20 percent below those of competitors — were bumped up across the board to close the gap. Associates and partners were assigned billable-hour targets, a move which had been attempted a few years earlier only to be abandoned after internal protests. The seniority-based partner compensation system was also scrapped. In its place, Culvahouse introduced a merit-based plan that takes into account things like a partner’s economic metrics, billable hours and cross-selling. At the same time, Culvahouse exhorted the firm’s attorneys to be more self-confident and even “more arrogant,” recalls a former partner, to go out and ask for their clients’ top, bet-the-company work. O’Melveny attorneys say the culture has become much more aggressive and entrepreneurial. “There’s a new energy and sense of purpose,” says Mark Samuels, the chair of the firm’s intellectual property and technology department. According to Daniel Bookin, a litigator Culvahouse tapped to head the San Francisco office, there’s a strong emphasis on cross-selling. As examples, Bookin cites Alaska Airlines and Avant Corp., two companies he represented in high-stakes litigation, that have since retained O’Melveny for transactional and employment work. “The most effective way to get business is to have a client know what your capabilities are,” Bookin says. Strategically, Culvahouse has focused on the firm’s intellectual property practice and its Asia practice as areas of growth. In December, O’Melveny opened a Beijing office, its second in mainland China. And the intellectual property and technology group has doubled in size to nearly 70 attorneys since Culvahouse officially established it as a standalone practice a year ago. “We’ve got five or six Ph.D.s today,” says Samuels. “We never would have been able to attract a Ph.D. molecular biologist to this firm a year ago.” SETTING SIGHTS Shortly after becoming chairman Culvahouse held a partner retreat that’s become ingrained in the memories of many: The new chairman announced that he had set a 2001 target for average profits per partner of $900,000. Considering that O’Melveny’s profits per partner the year before were $705,000, the number was extremely aggressive. “There were a lot of Doubting Thomases, including myself,” recalls Carla Christofferson, a litigator in the Century City, Calif., office. “The firm had been very conservative for a very long time and so this was a sea change in being aggressive, in being bold and saying, ‘We can do this.’” When the firm closed its books at the end of the year, profits per partner totaled $945,000, surpassing Culvahouse’s goal by 5 percent. And the march toward higher profits is hardly finished. The firm doesn’t report its 2002 financial results until after its fiscal year closes Jan. 31. According to people inside the firm, though, O’Melveny is on track to have another record year, meeting its 2002 goal of $1 million to $1.1 million in average profits per partner. This marked improvement in financial performance has won Culvahouse broad support among O’Melveny’s partnership. But while approval is clearly important, another key feature of the Culvahouse regime is that decision-making is no longer beholden to consensus. Every week, the eight members of the new “office of the chair” meet to discuss the firm’s business. The group is a huge departure from O’Melveny’s prior governance structure: The former 12-member management committee, which met only once a month, was representative, for many partners, of the constant hand-wringing that paralyzed the firm. “I think what captures the management committee is the belief that many of us had that it was a process designed to make poor decisions slowly,” says Culvahouse. Under the old management committee, proposals on everything from raising billing rates to reorienting practices were typically reduced to the lowest common denominator in order to achieve a consensus. And committee members often approached the job more as representatives of their individual fiefdoms than as managers for the firm as a whole. As the name implies, the new office of the chair puts a larger share of the authority in the chairman’s hands. While Culvahouse seeks input from the management team, decisions ultimately are his. A separate policy committee, roughly equivalent to a public company’s board of directors, holds the chairman accountable for those decisions. The new senior management team includes not just lawyers, but professional managers, including a 30-year veteran of accounting and consulting giant KPMG. Even the team’s associate representative is a former McKinsey & Company consultant whose assignment at O’Melveny turned into an in-house position. McKinsey’s relationship with O’Melveny goes beyond contributing a lawyer to its ranks. Retained shortly before Culvahouse became chair, McKinsey has advised the firm on everything from governance to business planning. It also helped O’Melveny develop analytical software tools to evaluate its fiscal performance. O’Melveny’s management uses the software to scrutinize the profitability of its various offices, practices, clients and attorneys, and to play out how altering a variable, like the staffing on a particular project, might affect that profitability. While this insight gives O’Melveny’s management great flexibility, some attorneys contend it has also institutionalized the firm’s obsession with the bottom line. “There was a monthly report on how you were doing, how you were stacking up,” says one former partner, likening it to “being graded.” Culvahouse says that the new analytical tools allow the firm to take an honest look at itself. “We now pretty readily understand that there are some client relationships, or some practices, that just don’t contribute very much economically.” O’Melveny now has about 5 percent fewer client relationships as a result of this introspection, acknowledges Culvahouse. He declines to specify which of the firm’s less-profitable practices have fallen out of favor. Pamela Westhoff, a former O’Melveny partner, says the real estate group she worked in was one practice that didn’t fit into the new order. The name of the group was changed to project development and finance, and its attorneys were encouraged to shift their practices from traditional office building transactions to higher-fee work such as airport and rail line development projects. The creation of a class of non-equity partners, who don’t sip from the firm’s profit pool, is another sign of the new priorities at O’Melveny. Culvahouse describes the non-equity partner class — which was introduced in February 2002 and currently counts fewer than 10 attorneys — as a way to attract public sector talent that lack books of business, like Justice Department lawyers. One thing it’s not, he says, is a device to inflate the firm’s profits per equity partner figure. He’s also adamant that while the firm has had typical performance-based attrition, O’Melveny has not laid off any attorneys, despite persistent rumors to that effect. One former associate says he and several colleagues in his department were laid off under the guise of performance-based termination at the end of 2001. He claims as many as 30 other associates throughout the firm met similar fates around the same time. Weeding out under-performing associates is hardly unusual at big firms, says legal consultant Peter Zeughauser. But he noted that this attrition typically occurs over the course of the year, rather than within a couple of months. JUST DESSERTS Asked what his biggest accomplishment has been in two-plus years of leading the firm, Culvahouse doesn’t hesitate: “It has to be the combination with O’Sullivan.” For partners at O’Melveny as well, July’s acquisition of the New York private equity boutique was a major coup — a confirmation that the new way of life was paying off. Indeed, without its improved profitability, it’s hard to imagine O’Melveny selling the merger to the partners at O’Sullivan, where average profits per partner were estimated to be around $1.3 million. Nor could the deal have been pulled off without Culvahouse’s strong and decisive leadership, say many partners. “Because A.B. had done such a terrific job in turning around the firm and increasing profits, I think he really built up a level of trust so that we were able to operate more quickly than we could have in the past,” says Christofferson, who also sits on the firm’s office of the chair committee. With the merger, O’Melveny gained 100 corporate lawyers, nearly doubling the size of its New York office, and one of the nation’s premiere practices in the private equity market. Not coincidentally, private equity is a practice that epitomizes O’Melveny’s new self-image. It’s a practice where clients are willing to pay top rates for good work, explains Culvahouse; a practice in which clients “were more interested in quality of work and results than in micro-managing how many associates you had on the file or that sort of thing.” Despite this pervasive profit-mindedness, attorneys at O’Melveny say the firm has not lost touch with its roots. San Francisco’s Bookin points to the firm’s strong tradition of pro bono work, and notes that the nearly 29,000 pro bono hours that O’Melveny attorneys recorded in the 11 months ending in September was up 15 percent from the 25,000 hours recorded in the same period the year before. The challenge will be to maintain that commitment as the firm continues to ride with the momentum of change. As one former O’Melveny litigator puts it: “The message [Culvahouse] gave is that there is a definite connection between your rank in the legal world and how much your partners make, and the partners decided that they wanted to be at the very top of the legal tier.”
THE FIRM AT A GLANCE 2001 Revenues: $490 million 2001 average profits per partner: $945,000 Number of lawyers: 912 Headquarters: Los Angeles Offices: Los Angeles, New York, San Francisco, Silicon Valley, Century City, Hong Kong, Irvine Spectrum, Newport Beach, Washington, D.C., Tysons Corner, Va., London, Beijing, Shanghai, Tokyo Primary practice areas: Litigation, entertainment and media, intellectual property and technology, international trade, government relations and regulatory practices, mergers and acquisitions. Roots: Founded in Los Angeles in 1885 by Jackson Graves and Henry O’Melveny as Graves & O’Melveny, a two-attorney firm for what was then a frontier community.

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