After a few tough years, O'Melveny has a new chair and a revamped strategy. Drew Combs reports

The Walt Disney Concert Hall in Los Angeles was filled with national political figures, including former vice president Al Gore, foreign dignitaries and much of the sprawling metropolis' ruling establishment on 28 March. The metal-skinned venue, winter home of the Los Angeles Philharmonic, was the setting for former US Secretary of State Warren Christopher's memorial service. Christopher had died 10 days earlier at the age of 85 after battling kidney and bladder cancer.

Also attending the service were hundreds of lawyers and staff members from O'Melveny & Myers, where Christopher practised law for 50 years and was chair from 1982 to 1992. For them Christopher, or 'Chris' as they referred to him, wasn't a larger-than-life civic leader or international statesman, but a treasured colleague and mentor. "For all of us at the firm today, Chris has been the heart and the soul of O'Melveny & Myers," said firm chair Arthur "AB" Culvahouse in a eulogy.

During Christopher's tenure as chair, he solidified the LA firm's expansionist trajectory by opening offices in New York, London, Tokyo and San Francisco. Christopher's community involvement, including leading a commission that investigated the LA Police Department following the beating of Rodney King, "brought the firm's sense of service into the modern era" says Christopher Brearton, managing partner of the Century City office. In 2002, Christopher oversaw an O'Melveny task force that defined the firm's core values: uncompromising excellence, distinctive leadership and superior citizenship. "Chris' memorial service had the effect of reminding people what's great about O'Melveny," says former partner Steven Olson.

The 126-year-old law firm's greatness has, at times, seemed forgotten in recent years amid faltering profits and partner departures. Now the responsibility for reminding O'Melveny of its storied past and leading it into the future falls to Bradley Butwin. The 51-year-old will become chair at the close of the current fiscal year in January 2012, ending Culvahouse's third term roughly a year early.

Butwin (pictured), a New York-based partner, joined the firm as part of its controversial O'Sullivan Graev & Karabell merger in 2002 and has led the litigation department for the past two-and-a-half years. A former Davis Polk & Wardwell associate, Butwin opted to become a lawyer instead of joining his family's insurance business.

He takes over at a challenging time for the firm. O'Melveny has seen a big churn in its partnership ranks. More than 100 equity and non-equity partners have left since the beginning of 2007. About three dozen partner departures occurred in the last 12 months alone. Some lawyers were incentivised to leave through early retirement packages, while others left for firms with a better fit for their practice areas or for individual reasons. During that same timeframe, O'Melveny brought in about 50 lateral partners, but only three during 2011. Currently, the partnership headcount is down 16% from 2007.

Some of the defections, including the loss of 60 transactional lawyers, have dealt a blow to the firm's corporate ambitions and further called into question the wisdom 
of O'Melveny's merger with 
the New York private equity boutique O'Sullivan.

Additionally, the firm's short-term financial metrics show mixed results, especially when compared to averages for The Am Law 100. O'Melveny's profits per partner (PEP) are still below their 2007 peak of $1.64m (£1.05m). Profits were down 7% in 2010 versus 2007. Over the same three-year period, The Am Law 100 averaged a 5% increase in partner profits. And O'Melveny's gross revenue has slipped; it dropped 16% while the gross revenue of The Am Law 100 increased 5% in the last three years.

The firm says that a Great Recession-induced downturn in corporate work, collection issues and the conclusion of several litigation matters were partly to blame for the recent financial results and that it is currently on track for its most profitable year ever. Moreover, a longer-term look at the firm's financials point to more favourable results. O'Melveny's 10-year financial metrics show huge gains in profits and revenue per lawyer (RPL).

Firm leaders also point to other strengths: a top-tier litigation practice (including a high-profile appellate group), novel uses of alternative fee arrangements, a roster of new clients and an ambitious Asia strategy.

RPL is also up almost 8% compared to 2007, due largely to a drop in lawyer headcount. The firm's lawyer ranks shrank 19% in three years; as of 2010 it had 884 lawyers. O'Melveny's headcount drop is the second biggest in the Am Law 100 during that timeframe. (Cadwalader Wickersham & Taft experienced a 25% drop in headcount over those three years.)

Butwin says the firm has a multi-pronged strategy for expanding its corporate and litigation work. O'Melveny plans to "focus on practices that tie into one another rather than on [recruiting individual partners with] large books of business". For corporate, he says the firm is in a "building period" and is setting its sights on more work in Silicon Valley, the entertainment industry and Asia (all bright spots for the firm in recent years) and leveraging litigation client relationships for transactional assignments. For litigation, Butwin says O'Melveny is handling increasing numbers of massive matters for Fortune 500 companies that are billed under alternative fee arrangements. (One thing Butwin doesn't see: a splashy merger. "I don't think that is something that is necessarily in our best interest," he says.)

And the partner churn doesn't faze him. "We kind of view [the partner] departures as an opportunity," says Butwin. "There is a greater sense of unity at [O'Melveny] than I've seen in recent memory because everyone who's here now has a high degree of confidence in the firm."

O'MELVENY'S search for parity between its litigation and corporate practice defined the firm, in many respects, during Culvahouse's decade-long tenure.

While Warren Christopher (pictured) may have been the heart and soul of O'Melveny, Culvahouse, who was counsel to President Ronald Reagan from 1987 to 1989, could be described as the firm's brain. The strategy he mapped out for O'Melveny has defined it more than anything else. He continued the firm's international expansion with new offices in Beijing, Brussels and Singapore. In recent years he spearheaded a series of early retirement plans that were meant in part to jettison partners and practices that were drags on the firm's profitability, say three former partners interviewed for this story.

Most notably, he led the firm's merger with O'Sullivan, seeing the combination as an answer to the longstanding issue of O'Melveny's lagging corporate practice. O'Melveny's merger with O'Sullivan didn't offer the firm a traditional bank-centric capital markets practice. But it dramatically increased O'Melveny's corporate practices and expanded the New York office, which grew from 118 lawyers to about 200 at its peak.

O'Sullivan, which also conducted merger talks with Kirkland & Ellis, brought prized relationships with private equity firms, including Apollo Global Management, to the merger. "Part of the plan was to have a much more substantial presence in New York and in our transactions department," says former O'Melveny partner Mark Easton, who is now deputy general counsel at Warner Bros Entertainment. "At that point in time, private equity was really very hot, and that looked like a place where we wanted to invest."

But there were problems from the beginning. O'Melveny's clubby culture clashed with O'Sullivan's aggressive style. Little was done to integrate the New York-based O'Sullivan lawyers, many of whom, according to some former O'Melveny partners, had no desire to integrate.

Butwin puts it more diplomatically. "My sense is that they were a little more siloed," he says. "The work didn't expand much… so there wasn't the same level of connectivity [with the rest of the firm]." Adding to the animosity, according to former partners, were the pay guarantees doled out as part of the merger to O'Sullivan lawyers, including to firm leaders John Suydam and Harvey Eisenberg, who each got pay packages that guaranteed $3m (£1.9m) a year 
for three years. (Suydam left the firm in 2006 to become chief legal 
officer at Apollo.)

"At the time of the merger, everyone understood we had to integrate two compensation systems, and the O'Melveny heritage partners were very accepting of having to give guarantees to heritage O'Sullivan partners," says O'Melveny vice-chairman Mark Samuels, who did not confirm the amount of the guarantees. "After those initial guarantees ended, a small number of O'Sullivan heritage partners had their guarantees extended. That was controversial, and I don't think we would do that again."

The guarantees ultimately weren't successful at keeping the O'Sullivan lawyers around for the long haul. Eisenberg, one of the architects of the merger on the O'Sullivan side, was among nine New York-based corporate and transactions partners who left O'Melveny in May to join Weil Gotshal & Manges.

Also part of the recent exodus were long-time O'Melveny partners on both coasts who were disgruntled by changes at the firm or who wanted to take advantage of the early retirement packages. The firm, aiming to increase profits, offered generous benefits to lawyers as young as 50 in 2005 and 2008. Partners also left for other reasons. On the West Coast, O'Melveny partners took real estate and public finance practices to firms that included Nixon Peabody and Manatt Phelps & Phillips. Other partners have taken corporate jobs or government positions.

To its credit, O'Melveny has added 50 lateral partners since 2007, bolstering the partnership which, as of this autumn, is currently at 201: 185 equity partners and 16 income partners. All told, the firm has seen a 16% drop from 2007 in overall partners and a 17% decrease in equity partners during that period.

But the internal dissension over the O'Sullivan acquisition played out in other ways. When Culvahouse ran for a third term as chair in 2008, he was challenged by four partners: John Beisner, head of the firm's class action group and a partner in the Washington DC, office; Robert Siegel, a labour and employment partner in the LA office; Gary Singer, a partner in the Newport Beach office and co-chair of the transactions department; and Darin Snyder, a San Francisco-based partner who headed the firm's intellectual property (IP) and technology practice.

When the partnership was polled, Culvahouse garnered support from 33% of the partners on a per capita basis and Beisner, the strongest of the challengers, received support from 21% of the partners on a per capita basis. However, Culvahouse (pictured) received support from a plurality of the partnership shares and twice 
as many as Beisner, so Culvahouse's name was the only one put forward by the policy committee for ratification by the whole partnership.

As a consolation, Beisner was asked to sit on a newly-created strategy committee. But less than a year after the election, Beisner, who represented Merck & Co in Vioxx litigation, moved his practice to the Washington DC arm of Skadden Arps Slate Meagher & Flom. Two other O'Melveny partners accompanied Beisner to Skadden. (Culvahouse's three other challengers remain at the firm.)

Culvahouse's defenders point out that the firm was going through a rough patch when he became chair. At a meeting in a downtown LA hotel in March 2000 (before Culvahouse became chair), the firm's partnership voted in favour of changes that were meant to make O'Melveny more profitable and competitive, including jettisoning the lockstep system and a compensation process that limited the number of shares that partners were awarded each year. Even one of Culvahouse's detractors describes the firm before Culvahouse became chair as "a happy place, but it was lagging economically". That lawyer adds: "We knew we had to change to not slip out of the top tier of Southern California."

During the course of Culvahouse's tenure as chair, O'Melveny's financial metrics have dramatically improved. In 2000, the year Culvahouse became chair, the firm reported $705,000 (£453,000) in PEP and $400.5m (£257m) in overall revenue. From 2000 to 2010, O'Melveny's PEP increased 116%, and RPL increased by 63%. O'Melveny's percentage of lawyers based in foreign offices has grown from 4% to 15%.

Culvahouse also had to steer O'Melveny through a tough period after many of the firm's LA-based clients, such as Security Pacific and First Interstate Bancorp, merged out of existence. In fact, 60% of O'Melveny's current top 50 clients were not clients in 2000.

While the firm has improved its finances over the long term, the short-term picture is more mixed. Since 2007, the height of the firm's profitability, O'Melveny has outpaced The Am Law 100 in RPL. Over that period, average RPL for The Am Law 100 has declined 1%, while O'Melveny's RPL has increased 8%. But in other metrics, such as gross revenue and PEP, the firm's performance versus the pack has steadily worsened since 2007. PEP is down 7% over this period, while average profits for The Am Law 100 are up 5%. O'Melveny's gross revenue also hasn't kept pace, falling 16%, while gross revenue for The Am Law 100 has increased 5% in the last three years.

In March, as Culvahouse neared the concluding year and a half of his final term (O'Melveny's mandatory retirement policy would prohibit him from completing a fourth term as chair), the firm brought in RHR International, a Chicago-based consulting firm, to assist it in selecting the next chair.

This time, the selection process was slightly different and included a detailed job description. O'Melveny's policy committee chose Butwin and two other litigators, Thomas McCoy and M Randall Oppenheimer, as candidates for chair in mid-July. Two weeks later, the policy committee picked Butwin as its choice for chair, and partners voted to ratify the selection.

Butwin's tenure begins in February, a year before Culvahouse's term officially ends. A former O'Melveny partner says Butwin is "really respected by everyone at the firm". He goes on: "People thought [Butwin] did a very good job as head of the litigation department, and that is the principal basis for why he was chosen as chair."

BUTWIN, a tall, thin securities litigator, prefers to look forward. The core of O'Melveny's new strategy, he says, is to focus on its strengths, including litigation and specific corporate practices – such as Silicon Valley. O'Melveny opened an office there in 2001, making the firm somewhat late to Northern California's start-up mecca. But two years later it got a boost with the addition of Warren Lazarow and four other partners who joined from the collapsing Brobeck Phleger & Harrison. During the past five years, O'Melveny has handled an average of 175 venture capital transactions each year. In the past three years, the firm has been involved in four dozen initial public offerings or sales of venture-backed companies, including the sale of Apache Design Solutions to Ansys for $310m (£199m) last year.

Deal activity involving the firm's longstanding entertainment practice has also increased in recent years and grown in complexity. The practice has expanded from film financing deals for single pictures to include much more complex multi-picture financing and media licensing deals. "We used our Hollywood pedigree to start doing largescale [motion picture] slate financing, licensing and mergers and acquisitions," says Century City partner Brearton. Those matters include representing the International Olympic Committee in television rights negotiations with China Central Television.

Then there's Asia, where O'Melveny now has 102 lawyers in five outposts, handling about a third of the firm's corporate work. O'Melveny's presence in the region has grown steadily from the opening of a Tokyo office in 1987–Singapore was the most recent addition, in 2008 – partly because of high demand for work involving equity and debt capital markets transactions, restructuring, private equity, M&A and investment funds. (In November the firm announced the launch of a formal association with Indonesian law firm Tumbuan & Partners.)

According to Bertie Mehigan, a lateral addition from White & Case who co-launched the Singapore office, the Asia presence has succeeded in part because of firm management's openness to alternative fee arrangements. "Flexibility with fee arrangements is critical in Asia," he says. "That has always been a part of our struggle, but at O'Melveny this is something senior management understands and accepts."

O'Melveny's senior management also views alternative fee arrangements as key to the future success of the stateside litigation practice, which has defined the firm for much of its history. In recent years O'Melveny has handled textbook examples of bet-the-company litigation for a wide range of major corporations such as Apple, for which the firm works on IP and securities matters; Exxon Mobil, which it has represented in claims stemming from the Exxon Valdez oil tanker spill and Bank of America, for which the firm has been go-to counsel on much of the litigation connected to mortgage lender Countrywide.

On any given day, as many as 100 lawyers at the firm could be handling a wide variety of matters for Bank of America, including ERISA matters, securities litigation, antitrust litigation and regulatory matters. O'Melveny has been able to grow this relationship in part thanks to an alternative fee arrangement that dates back to 2004 and includes blended rates and discounts if certain results aren't achieved.

Butwin also sees opportunity in growing the corporate practice by leveraging litigation relationships with Fortune 500 companies. It isn't a strategy that has worked consistently for the firm in the past (which is why O'Melveny merged with O'Sullivan), but the possibilities are too attractive for Butwin to ignore. "We have strong relationships with financial institutions on the litigation side," Butwin says. "We are not [now fully] leveraging those relationship to grow capital markets, but we will." It's apparent that firm leaders still believe this is the only way to achieve parity between corporate and litigation. The latter represents 60% of annual revenues and consists of 459 lawyers (120 of them partners). "Would I rather [have a] 50-50 split between litigation and corporate?" Butwin asks rhetorically. "Yes."

What Warren Christopher, who kept an office at O'Melveny's Century City branch until his 
death and was described as a "senior partner" by the firm, truly thought about the leadership fight in 2008 and the partner departures isn't entirely clear. In the past he had been known to have lunch with key partners, sometimes at the exclusive California Club, to express his thoughts as the firm faced critical challenges. But in recent years he was more guarded in his views, according to one former partner.

In one of his last interviews, Christopher attributed O'Melveny's longevity to its dynamism. In 2010, in a Los Angeles Business Journal article commemorating the firm's 125th anniversary, Christopher said: "We were never prepared to stand pat with what we had." Now it's up to Butwin to carry on that tradition.

This article first appeared in The American Lawyer, an affiliate title of Legal Week.

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