KEY POINTS:
Big law firms will need to do better at understanding their corporate clients if they want to slow the drift towards using in-house legal teams.
A survey of more than 100 businesses on both sides of the Tasman shows that nearly a third of New Zealand respondents expect to reduce their reliance on large law firms over the next two years. Just 17 per cent expect to increase their reliance on big firms.
None think they will reduce the size of their in-house legal teams, and more than half expect their in-house legal teams to grow.
When asked what law firms could do to improve their relationships with businesses, the most commonly cited factor was a better understanding of clients' needs.
The survey - jointly commissioned by the Australian and New Zealand corporate lawyers' associations - canvassed the leaders of in-house legal teams, the people usually responsible for sending legal work outside the company.
The survey shows most complex legal work is still outsourced.
But Helen Mackay, president of in-house lawyers' network the Corporate Lawyers Association of New Zealand, says there is a growing trend for businesses to do more legal work themselves.
This includes complex project and transactional work, which is sometimes carried out as a partnership between internal and external legal advisers.
Mackay says cost savings are the number one reason for holding on to legal work, but a perception that in-house counsel better understand a business is also a factor.
"[As an in-house lawyer] you end up being somewhat more than a legal adviser, because you know the business so well," she says.
"You're much more of a strategic adviser as well.
"Given that there is this competitiveness now with law firms, a law firm that doesn't take the time to truly understand the client, and what the client needs, will find that they will not be receiving instructions."
According to the study, compiled by New Zealand company Team Factors, the median cost of an in-house lawyer in New Zealand is $81 an hour ($121 excluding time spent on administrative tasks) - considerably cheaper than most law firms. And respondents are less than enthusiastic about the lawyerly practice of hourly billing. Just 3 per cent say it is the best way of pricing legal services (though most say they have yet to find a better system).
As well as in-house lawyers, boutique law firms benefited from changing trends; 45 per cent of New Zealand survey respondents expect to increase their use of specialist firms over the next two years.
Law firms and in-house legal teams are competing for slices of a very large pie.
Nearly three-quarters of respondents spend more than $1 million a year on legal services (in their own currencies) and more than 15 per cent spend over $10 million a year.
The total annual legal spend for all respondents in the survey is $1.25 billion.
* HOW WE COMPARE
How many lawyers does a company need to make $1 billion?
It depends which side of the Tasman you are on.
A new survey shows New Zealand respondents in the private sector employ a median of 13.3 lawyers per billion dollars of revenue, while Australian companies employ eight.
New Zealand companies also employ more lawyers per 1000 staff - eight lawyers per 1000, compared with four per 1000 in Australia. However, more lawyers do not necessarily mean higher costs.
Higher salary costs in Australia and a higher proportion of public sector respondents in New Zealand mean the median cost of employing an in-house lawyer is considerably less in New Zealand than Australia.
One in-house lawyer (including salaries, expenses and overheads) costs $175,000 in New Zealand, compared with A$322,000 in Australia.
Even when public sector respondents are excluded, the median cost of an in-house lawyer in the New Zealand private sector is a comparatively low $241,000.
Median total legal costs for the private sector are 0.62 per cent of revenue in Australia and 0.67 per cent of revenue in New Zealand.
Businesses in both countries split their legal spending fairly evenly between in-house and external lawyers.
Australian respondents reported a median external legal spend (law firms and barristers' costs) of A$1.5 million, while median direct legal costs in-house are just under A$1.7 million.
New Zealand respondents report a median spend of about $800,000 each for external legal costs and in-house legal direct costs. The median spend on all external and internal legal costs for the New Zealand respondents is just over $2 million.
