A study by the Corporate 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 newly released report.

The studyinvolved research with more than 150 companies and government agencies thattogether spend more than $2 billion on legal costs annually.

“It’s hardly surprising that costs are amongst clients’ top concerns”, says former CLANZ president Ron Pol, whose professional services consultancy Team Factors conducted the research.

“But it’s not just the size of legal fees; the way that lawyers communicate costs – and the timely reporting of unexpected overruns – seems to be a big part of the issue.”

The general counsel of some of Australasia’s biggest organisations - with some of the largest teams of in-house lawyers and most sophisticated legal procurement systems - reported that when they asked law firms for fee estimates, the final cost was consistently on or below budget just 4 per cent of the time.

Only about a third (32 per cent) reported that law firms met budget more than half the time.

Despite many of these organisations spending tens of millions of dollars on legal fees each year, the report also points to the importance for law firms to better understand evolving client needs.

“The message is clear,” said Helen Mackay, CLANZ chief executive. “Optimal outcomes and value for money are more important than hourly rates; but overall a better understanding of the needs of clients is critical."

Financial data also highlights the gap between the hourly cost of in-house lawyers and law firm hourly rates. The median fully-loaded in-house counsel hourly cost based on total hours worked is $123 in New Zealand. Even on a ‘chargeable hours’ basis similar to law firm measures, the median hourly cost of in-house counsel is $183; considerably lower than the top rates paid to law firms, which can be as much as $600 per hour, or more.

“Little wonder that 43 per cent of New Zealand respondents, and even more in Australia, reported that they expect to increase the size of their legal department over the next two years,” said Mackay.

“This correlates closely with the top issue facing legal department leaders,” adds Pol.

“Workload/time pressure remains the number one issue, with the need to reduce outside law firms’ costs another. Although many issues need to be considered in decisions about the optimal legal department size, sometimes the quickest way to relieve both issues at once is to increase the size of the legal department.”

The findings support this. Most legal departments predict growth, albeit at a moderate pace over the next two years.

“This presumably reflects that workload and cost pressures are tempered by the need to make carefully considered decisions," Pol said.

"Just like their law firm colleagues, resource and budget limitations also feature as key issues facing legal department leaders.”

At a broader level across the legal services market, the impact of legal departments more actively reducing the cost base of their companies and government agencies would have a direct impact on the revenue base of many law firms.