An extensive newreport to be released next week contains unwelcome news for large law firms as government and clients look for ways to cut legal costs.

A study by theCorporate Lawyers Association of New Zealand (CLANZ) and the Australian Corporate Lawyers Association (ACLA), the ACLA/ CLANZ Legal Department Benchmarking Report 2010, delivered results to the report, out next week.

The study involved research with more than 150 companies and government agencies that together spend more than $2 billion on legal costs annually.

The report will reveal the extent to which general counsel experienced pressures to reduce costs falls unevenly between legal department and law firm costs, and between Australia and New Zealand.

More than half the New Zealand respondents (55 per cent) reported pressures to reduce legal department costs, with 22 per cent reporting significant or very significant pressures.

In Australia, there was a higher level of pressure to reduce legal department costs (63 per cent)and a greater intensity to do so, with 42 per cent reporting more significantpressure.

Demands on New Zealand respondents to reduce law firm costs were slightly more pronounced compared with legal department cost pressures (61 per cent were under pressure to reduce law firm costs, with 25 per cent facing significant or verysignificant pressures).

Their Australiancounterparts, however, again faced more intense pressure to reduce law firm costs; 84 per cent reported demands to reduce law firm costs, with 47 per centre porting significant or very significant pressure to curb law firm expenditure.

"Greater pressures to reduce law firm costs is fairly typical", said former CLANZ president Ron Pol, whose professional services company Team Factors conducted the research.

"This is because law firm costs are often the first target of many cost-cutting strategies."

"The difference between New Zealand and Australia is, however, more difficult to explain", he said.

"Because Australia didn't technically suffer a recession the glib answer might suggest greater cost-cutting pressures in New Zealand. We have however worked with corporate and government agencies on both sides of the Tasman equally keen to cut costs and improve the value for money proposition across their legal services portfolio".

The findings are reinforced by the extent of cost reductions already achieved. Reflecting theirgreater pressures, Australian respondents were also more likely to havereported having already achieved bigger savings over the past two years than their New Zealand colleagues.

"Because it isoften easier to reduce discretionary law firm costs than fixed legal department costs" Pol said, "it is also likely that the largest cost reductions reported, and those currently being planned, involve a significant element ofreduced external legal fees."

CLANZ chiefexecutive Helen Mackay said big firms contain some unwelcome news.

“None of the respondents, who together spend more than $2 billion on total legal costs,expect significantly to increase their use of big firms. Although most anticipate no material change, in their drive to cut costs as many as 30 per cent expect to reduce their use of national full service firms over the nexttwo years,” she said.

The impact on these big firms is even more significant looking at the intentions of clients withthe largest legal departments and the biggest corporates, the study found.

Nearly 40 per cent of those often considered the premier clients of the biggest law firms reportthat they anticipate reducing their use of these firms over the next two years.

Prospects are morepositive for local or regional full services law firms, and for specialist/boutique firms.

Respondents expectto use these firms more; by 23 per cent and 29 per cent respectively.

Nineteen per cent of New Zealand respondents also anticipate increasing their use of overseas law firms.

The Reports will beavailable for purchase from 24 August.