The New Biglaw Business Model, According to O'Melveny & Myers

onSeptember 16, 2009 at 6:05 PM

There has been so much talk about the death of Biglaw that the term has become a cliché. These are challenging times, to be sure. But many firms are in the process of adjusting to the market, by making long-term plans to revise their business models so they can thrive in the future.
One such firm is O’Melveny & Myers. About a month ago, the firm released a five-year strategic plan to its associates and counsel. At a time when some firms are keeping their employees in the dark about long-term issues, O’Melveny — to its credit — decided to let its people know what management is thinking.
Above the Law has obtained a copy of this five-year plan. The document outlines how O’Melveny intends to compete going forward. Instead of aiming for marginal cost savings by making a few cutbacks here and there, the O’Melveny memo tries to rethink the firm’s overall business model — and gives us a chance to talk, once again, about the long term viability of Biglaw.
Let’s take a look into the O’Melveny’s — and perhaps Biglaw’s — future, after the jump.

The five-year plan begins with a statement of “The Vision.” It’s not exactly visionary: O’Melveny & Myers wants “the most desirable engagements,” and it wants to be “primary outside counsel… to a large and growing list of clients.” It intends to do this by — surprise surprise — providing “the highest quality legal service.”
Then the memo gets more interesting. It expresses management’s plan to “adopt[] a single rate card by FY2012, with volume and ‘investment’ discounts and appropriate alternative fee arrangements.” It announces OMM’s intention of “becoming the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost effective client service.”
The plan proceeds to take a critical look at O’Melveny’s market position. Management talks about the type of clients the firm has, the type of clients it wants, and the kind of relationship it would like to have with clients going forward. It expresses the view that moving in the direction of flat-fee work will be beneficial to the firm’s clients — and, ultimately, to the firm’s profitability. The firm acknowledges that, in order to attract the client base it desires, it will need to re-tool some of its practice groups (e.g., by developing a competitive restructuring practice as soon as possible; bankruptcy partners looking to lateral, send your résumés to OMM).
The memo is commendably candid; it’s not all cheerleading. One paragraph begins: “In the very recent past, our business model, as a whole, has yielded disappointing financial and practice growth results.” The plan notes that O’Melveny’s litigation model, “which depended heavily on high charge hours levels by associates, counsel and partners to offset the impact of discounted rates and increased write-offs of expenses and time, has been under pressure for at least three years” — i.e., well before the Great Recession began.
What’s behind this? Well, as we’ve been telling you for months, outsourcing is coming to — or has already arrived at — a firm or company near you. “Document review and production have been outsourced altogether or client-directed to contract attorneys,” the memo states, “thus eliminating much of the work formerly assigned to junior associates.” These difficulties won’t go away with the recession: “[O]ur litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond.”
The transactional practices — which are treated somewhat more favorably in the memo, making us wonder whether the corporate lawyers played a bigger part in drafting it — face challenges too. Although they “typically charge effective higher rates, have equivalent leverage, and enjoy a substantially higher realization than comparable Litigation practices…. [they] will not be able to deploy and charge for large numbers of associates in the deals that will be done when the economy rebounds.”
What changes have to be made to address these new realities? For one thing, the firm wants lower associate-to-partner leverage. O’Melveny plans to reduce its leverage to “as low as 2 to 1 in some practices,” although this “will be partially offset by increases in charge hours and by fortifying associate and counsel quality.” In other words, getting an associate position at OMM just got a lot harder.
But this document is not particularly focused on associate issues. If anything, the memo is more concerned with what Biglaw partners will have to produce — and sacrifice — in order to help firms thrive in the future:

O’Melveny anticipates that moving to a unified rate structure — one based on (generally higher) New York rates, reading between the lines of the memo — will not be popular with all of its partners. Or all clients — the firm contemplates losing some business in the short term as it moves in this direction. But it expresses confidence that its partners will be able to bill and collect on the new rates, “based on our experience with prior rate increases,” and it also notes that the firm “will seek out opportunities to take on high-value litigation and transactions engagements at fixed fees” (emphasis in original).
If you’re going to (1) raise hourly rates and also (2) use more flat-fee billing, you’ll need hyper-efficient and hardworking lawyers. The plan contemplates this. The memo notes that “a significant percentage” of its top performing associates bill around 2200 hours. O’Melveny believes that if it continues to pay its people “at the top of the market,” it will be able to attract and retain the best people. OMM believes that developing and maintaining its top performers will be crucial in a market where excellent and efficient work product is going to be more important than ever.
That naturally leads to a discussion of O’Melveny’s recruiting approach. You’ll notice that the new plan isn’t all that different from what we are used to seeing from Biglaw firms:

While there have been a few firms that have canceled their summer programs, at least for 2010, it seems like O’Melveny’s approach is the one that most Biglaw firms are taking. Firms still want and need fresh talent. One would suspect that OMM (like its peer firms) is planning on hiring fewer new associates as the firm tries to meet its revised long-term leverage goals. But that doesn’t mean that influx of new talent will stop entirely.
Despite all of the nitty-gritty discussion about the financial future of the firm, the O’Melveny plan makes it a point to emphasize the firm’s core values and commitment to pro bono work and diversity. People interviewing with O’Melveny should expect to be told about the firm’s core principles, and applicants will be judged for fit with these values as well as law school credentials.
As a whole, O’Melveny has taken an impressively broad overview of the market and its position. This is not a plan designed to allow the firm to merely hang on and weather the economic storm; instead, the firm is taking proactive steps to make itself more competitive into the next decade — and beyond.
O’Melveny doesn’t think Biglaw is dying; it’s evolving. The business model is changing, and it appears that O’Melveny is prepared to engage with the new market.