Saturday, October 19, 2019

The feast or famine life of an O’Melveny partner

       When interacting with O’Melveny's partners, you might have noticed that they sell their services aggressively. Perhaps you've read news reports accusing them of doing unprincipled things for their clients. They appear to be hungry. I was recently informed of a public resource that might explain this behavior. It provides a decade of financials for a particular O’Melveny group.

       Before getting into the numbers please allow me to provide some background. As a preliminary matter, please read this prior post, which explains O’Melveny’s “eat what you kill” culture and "margin." Margin is the profit distributed to partners at the end of the year. Below you’ll see a real-world example of that margin.
 

       This number, call it margin or profit, is apparently calculated as follows. The firm first allocates expenses to a group of partners, and it then allocates revenue to that group. The difference between these two is the group's profit. Another calculation is then performed, to allocate the group's total profit among the partners in the group. 

       How are a group’s expenses and revenue calculated? It’s partly based on economics, e.g., how many hours did the attorneys in that group bill, and at what rates? That would go into the group's revenue. How much was the group’s salary, real estate, administrative and other costs? Those would go into the group’s expenses. Standard economic notions of revenue and expense.
 

       But that’s not where the calculation ends. There is a political component to it. I recall partners complaining about their profit distribution; they wondered if the firm had unfairly adjusted the numbers to reduce their profit. I don’t know if such adjustments occurred, but they might have. One can easily imagine plausible scenarios. For example, if there is an older, politically powerful partner who needs to be paid millions of dollars per year, even though he does not do much, then that money has to come from somewhere. Perhaps management could allocate additional expenses to other partners, to reduce their profit (and thus transfer that profit to the old and inactive partner). Or management could reduce the revenue allocated to other partners, which would have the same effect. Of course none of this would be wrongful, as the relevant agreements would be written in a way that allows for such adjustments. So the revenue and expense numbers below may or may not include such non-economic adjustments. Who knows.

       Any way, let’s get into the numbers (sourced from here.)



       As you can see, although the average O'Melveny partner made a reported $2.2 million in profit per partner, in 2018, this is not distributed evenly. This particular group appears to earn less than the rest of the firm. So an O'Melveny partner's income varies greatly. They could make over $5 million or even $10 million per year, or they could make much less. Notice also that this group’s profits per partner fluctuates. In 2012, the number was almost seven times what it was in 2017. This might explain why they're so hungry. If they don't sell, they might not get paid. 
Brad Butwin, George Demos, O'Melveny profits per partner, careers, salary