Law firms are feeling the pinch as Britain's top companies, under pressure from the economic downturn, slash their spending on outside legal advice.

Companies are finding it cheaper to hire lawyers for their own legal departments rather than give work to external law firms, according to a survey by the Practical Law Company, a respected legal publisher.

The survey, to be published this week, found that 72.9 per cent of British companies have reduced the number of instructions to outside law firms in the past year, while just over half have added staff to their own legal departments to cope with the increased workload.

Large companies typically employ between 20 and 40 lawyers to handle routine legal matters such as commercial contracts and employment, with more complex work such as litigation and corporate finance outsourced to a panel of law firms.

A FTSE100 company can spend up to £15 million a year on outside legal advice, with large banks and oil companies spending as much as £100 million.

That spending is coming under increasing scrutiny as general counsel face pressure from their boards to reduce costs.

Geoffrey Timms, group general counsel at Legal & General, the UK's third-largest life insurer, said: “Companies were already looking closely at the cost of external advisors and the current economic climate will only increase that scrutiny. All companies will be looking at ways to maximise the value they're getting."

Corporate law firms typically charge between £300 and £600 an hour. Those rates have been driven higher in recent years as firms sought to cover the cost of intense competition to recruit young lawyers. Demand for talent has grown so acute that a newly qualified solicitor in their mid-20s can command up to £95,000 a year.

However, those firms are now in a tough position. Despite a record year in 2007-08 in which many of the top 20 posted revenue growth in excess of 15 per cent, the impact of the credit crisis is beginning to be felt. Lucrative practice areas such as property and structured finance have all but dried up and there are fears of widespread redundancies.

In-house lawyers earn less than their counterparts in private practice, with a junior lawyer likely to earn between £65,000 and £120,000 a year plus benefits and bonus. But the shorter hours, greater flexible working arrangements and opportunity to gain commercial experience have made it an increasingly popular career path.

Yet companies are also finding it difficult to recruit lawyers. According to the PLC survey, 46.3 per cent of the companies questioned said it was either “very or extremely difficult” to find the right people in the current market, while only 23.8 per cent said it was not difficult.

Companies prefer lawyers with broad legal skills and a general understanding of business, but 37.8 per cent of the respondents said that private practice was not at all effective as a training environment. Only 18.3 per cent said it was very effective.

Mr Timms said: “Lawyers who join us get the opportunity to work at the sharp end, providing commercial judgments and solutions rather than purely technical advice. This has helped us attract good people who may have been frustrated by the lack of opportunities they previously had in private practice.”

The survey was based on interviews with 86 companies in sectors such as manufacturing, IT and financial services.

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