Don't Cry For O'Melveny & Myers

The Los Angeles based mega-firm O'Melveny & Myers LLP reportedly is in the hole by $25 million (and counting) for its representation of convicted Enron executive Jeffrey Skilling.

According to the Washington Post, O'Melveny collected $40 million from Skilling and Enron's insurers, but still managed to "spend" $65 million on Skilling's defense, with appeals still to go.

This is a good example of the profligacy of large law firms when it comes to major trials. O'Melveny devoted more than 20 lawyers, including three leading partners, to the case. Granted, it was a five-month trial, but Skilling could've gotten just as effective--maybe more effective--representation from a smaller shop specializing in white collar criminal defense.

When it comes to large law firms, all they really know is how to overstaff the big cases. Often, you get a large number of younger associate lawyers who really don't know much about anything, but who get billed out a rates of $200-$400 an hour, or more. Much of their work is spent sifting through documents.

The rationale is that the client needs someone with the experience and training of these young lawyers to spot the important documents among the millions of pages of chaff. Reality is that young law grads are poorly trained for such work, which could easily be done by smart college students or good legal assistants for less than $50 an hour.

Worse, though, is the communications issues created by having all those warm bodies working on a case. Just to keep in touch, they generate thousands of emails to each other, require hundreds of meetings and conference calls, exchange dozens of memos, and spend countless hours just keeping up with each other. Partners have to coordinate all those moving parts, taking away from their time and focus on the key aspects of the case.

Of course, if you have a paying client, it's worthwhile, especially since the profit margin in a well-managed large law firm should be between 30-35%. (In other words, for every $3 billed, the partners make $1 in profit.)

Applying this rule of thumb to O'Melveny, they're a little in the hole on the Skilling case, but they certainly haven't "lost" $25 million. In any event, any "loss" is the fault of the people running the case--they could've given Skilling first rate representation for a "mere" $40 million. Indeed, with more efficiency Skilling might even have gotten better representation, although he still would have been convicted.

The real problem is that lawyers are about the most overcompensated people in America. (Yes, the Curmudgeon was one and he was definitely overcompensated.)

Imagine if O'Melveny had taken a pass on Skilling and instead donated $25 million to charity. Now that would be news!

Weather Curmudgeon

10-day forecast for today: Hi 83, Scattered T-storms, 60% rain. Rating: N
5-day forecast for today: Hi 83, Sunny, 20% rain. Rating: Y
Actual: Hi 85, sunny, no rain.

The 10 day forecast was no good; the five day forecast was pretty much on the mark.