Key takeaways:

• • • Productivity softened at an unexpected time — Productivity declined to -0.4% in Q1 2026, even as demand remained strong at 2.7% growth.

    • Value per lawyer provides the clearer signal — Fees worked per lawyer (or value per lawyer) continues to grow, reflecting the combined impact of hours and rates despite volatility in productivity.

    • Margin pressure is emerging unevenly — In the Midsize segment, value growth is trailing expense growth, creating early signs of compression.

The Q1 2026 results present an unusual combination. Demand grew by 2.7%, well above historical norms, and worked rate growth remained elevated, with Am Law 100 firms pushing toward double digits, according to the Thomson Reuters Institute’s recently released��Q1 2026 Law Firm Financial Index. These inputs would typically support strong overall performance.

Yet productivity declined slightly, falling to -0.4% after six months of positive growth. On its own, that change is modest. In context, however, it reflects a more interesting shift in how performance is being generated.

The key is understanding what productivity measures and what it does not. Law firms’ traditional measure of productivity is hours worked per lawyer, which tracks the average number of hours logged by a firm’s lawyers to give an estimate of efficiency. However, that traditionally has not incorporated pricing mostly because, historically, law firms have focused more on the hourly output of lawyers as the mark of success. This means firms were often not concerning themselves with whether the pattern is profitable, let alone taking into account factors like demand elasticity or automation’s impact on the equation.

This is changing, however. As more and more revenue growth is being driven by rate increases rather than increases in demand or hours per lawyer, the disconnect is being magnified. And this distinction helps explain why strong inputs are producing a more muted output and why understanding that relationship is vital for firm leaders to get an accurate picture of how large law firm economics are evolving.

The divergence between hours and value

To see that situation more clearly, it is necessary to move from activity-based metrics to value-based ones — and fees worked per lawyer (or what we’re calling value per lawyer) provides that view. Fees worked is a pre-realization revenue proxy, representing the total value a firm produces before billing and collections take over, then averaging it across lawyer headcount. This method accounts for scale, giving a cleaner read on efficiency than looking at just raw hours. Because fees worked per lawyer folds rates and hours into a single measure, it captures the value that the traditional productivity metrics leave out.

As shown in the chart below, the industry is experiencing a widening gap between the hours lawyers work and the value that their work generates even as demand has remained consistently positive and rate-driven growth has stayed strong across recent quarters. As a result, productivity has been more volatile and recently turned negative. At the same time, fees worked per lawyer (or full time equivalent) has continued to trend upward, indicating that value per lawyer is still increasing rapidly despite what the old metric might have historically implied.

That means that law firms are producing far more value per lawyer even though hours per lawyer have softened slightly. The factor magnifies once you consider what period firms are measuring against. The first quarter of 2025 was exceptionally strong, creating a high baseline that can subdue the current level of growth — against a “normal” year, law firm performance would be even greater.

While this is a historically recent phenomenon, it’s not one unique to 2026. Strong rate growth has often offset weaker productivity for the last couple of years. What makes the first quarter of this year more unique is that it no longer seems uniformly true across the market.

Where performance is beginning to diverge

The Q1 2026 data shows a clear separation in how firms of different sizes are translating demand and rates into value per lawyer. Among Am Law 100 firms, for example, strong rate growth remains the primary driver of revenue performance, which is being supported by disciplined headcount management that’s kept efficiency high. These firms have continued to push pricing while maintaining selectivity in hiring, allowing value per lawyer to remain resilient even as productivity softens.

The Am Law Second Hundred has embraced a different strategy. Firms in this segment are continuing to pursue growth through lateral hiring and increased capacity. This supports overall revenue but can dilute per-lawyer metrics as new lawyers ramp up. The result is softer value per lawyer despite the segment’s continued headcount expansion.

The most consequential shift is occurring in the Midsize law firm segment. Rate growth has slowed for Midsize firms, while those in other segments have maintained or exceeded prior pacing. At the same time, expenses are accelerating and are now outpacing overall fees worked growth. This creates a dynamic in which value per lawyer is still increasing, but it’s running closer to expenses.

What this all means for profitability

In the near term, there is no indication of a broad downturn. Value per lawyer continues to grow despite declines in hours per lawyer, and pricing remains strong, particularly at the top of the market. At the same time, however, the balance between value and cost is beginning to shift, most notably in the Midsize segment, where expenses are rising faster than revenue proxies.

Looking ahead, we will keep our eyes on value per lawyer, which is developing into a critical performance metric. If this metrics continues to strengthen as comparisons normalize, the softness in Q1 will likely prove temporary. If it remains constrained, particularly in segments already facing cost pressure, however, it may point to a more persistent challenge.

The broader takeaway reflected in the Q1 2026 LFFI data is that law firm performance is no longer defined primarily by the traditional measures such as hours per lawyer at the forefront without the context of rates. Indeed, this should no longer be given as much psychological weight as it was before the pandemic. In a market shaped increasingly by pricing power, the more important question for today’s law firm leaders is how much value each lawyer is generating and whether that value is keeping pace with the cost of delivering it.

You can download a full copy of the Thomson Reuters Institute’s��Q1 2026 Law Firm Financial Index here

Key insights:

• • • Branches too, not just trunks, drive growth — Across firm segments and US regions, litigation and corporate work still anchor demand, but they are not always the main sources of new hours.

    • Soil conditions vary sharply by region — The Southwest US and international markets led all regions with 5.2% and 6.1% demand growth, respectively, driven by niche and transactional practices, while the Midwest and Eastern regions grew more modestly.

    • Midsize firms are growing through specialization — Struggling to compete on volume with the Am Law Second Hundred or on rates with the Am Law 100, Midsize law firms posted 2.6% demand growth powered primarily driven by smaller, specialized practices.

The first quarter of 2026 arrived with law firms still standing on solid ground, although the footing is beginning to feel a little less certain beneath the surface. As the Thomson Reuters Institute’s recent��Q1 2026 Law Firm Financial Index (LFFI) reported, the score landed at 55 — exactly the historical average since 2006, which is a modest place to be when you consider that Am Law 100 firms pushed worked rate growth to nearly 10%, and overall demand came in at 2.7%, roughly triple the long-run average. Those are not average inputs. Something is absorbing the gains.

The story beneath the headlines is one of diverging strategies, uneven soils, and the quiet question of whether a tree can keep growing by strengthening only its trunk — or whether it needs to extend its branches.

Reading the soil: Regional demand across the US

Just as trees grow differently depending on the nutrients available in their soil, law firm demand across different regions of the United States reflects the distinct conditions shaping each local market.

The western half of the country set the pace. The Southwest posted the strongest domestic growth at 5.2%, driven not by the dominant practices of litigation or corporate work, but by a constellation of smaller practices (labeled “others”) that collectively delivered the largest single contribution to new hours — 12 of the 52 additional hours worked per 1,000 compared to Q1 2025. Labor & employment and litigation followed, but the headline is that niche practices — treated by many firms as secondary concern — carried the region.

The West grew at 4.8%, with labor & employment as its leading driver, although intellectual property imposed a meaningful drag: Law firms in the West are currently working 27 fewer hours per 1,000 on IP matters than they were a year ago, a loss that’s partially masking an otherwise healthy broad-based expansion.

International operations led all regions at 6.1% growth, but with an important asterisk. This region, which captures demand generated by US-headquartered firms operating abroad, was recovering from a period of contraction. The surge was powered almost entirely by corporate general and M&A, making it the most transactionally concentrated region in Q1. The flip side —real estate, litigation, and “others” practices all contracted, meaning growth here is reliant on a narrower set of practices than it may appear.

The Eastern and Central regions told a more measured but arguably more durable story. The Midwest grew just 2.0%, but with a notable quality as no practice area contracted. Every discipline contributed at least marginally to new hours worked, with litigation doing the heaviest lifting. The Northeast and Southeast each came in at 2.8%. In the Northeast, growth was similarly broad, with no practice in retreat; while the Southeast offered a small twist as corporate general led for the first time among the regions examined. Litigation followed close behind, and together the two practice areas accounted for 18 of 28 new hours worked. Those two practices — the trunk of any large firm’s business — pulled more relative weight in the Southeast than anywhere else in the country.

The story beneath the headlines is one of diverging strategies, uneven soils, and the quiet question of whether a tree can keep growing by strengthening only its trunk — or whether it needs to extend its branches.

What stands out across this regional picture is that for most of the US, the new growth is not coming just from the traditional core. Corporate general and litigation remain the largest absolute contributors to demand — the sturdy trunk — but in the West and Southwest, it is the branches that are responsible for incremental gains: labor & employment and a diverse mix of smaller practices. In US regions in which the trunk remains the engine — such as the Midwest, Southeast, and Northeast — growth is still real but narrower. The more resilient growth stories tend to be the ones in which no single branch bears all the weight.

The tree type matters too: Demand by firm segment

Regional soil explains some of the variation in Q1 demand, but not all of it. The type of firm shapes how growth is structured just as much as geography. And in Q1 2026, the three segments grew in ways that were as different from one another as oaks from aspens.

The Am Law 100 posted demand growth of 1.2%, the lowest of the three segments, but this is consistent with a strategy built primarily on rate power rather than volume. Of the 12 additional hours per 1,000 worked compared to Q1 2025, transactional practices contributed 8 hours, and counter-cyclical practices added 5 among Am Law 100 firms. The one drag came from intellectual property, which contracted by 1 hour. For the largest firms, demand is supplementary to rate growth — the trunk is wide, and thus, the tree does not need to grow tall to be profitable.

The Am Law Second Hundred grew 4.0%, the strongest demand performance of the three segments, and the composition of that growth is striking. Of 40 new hours per 1,000 worked, counter-cyclical practices — led by litigation at 15 hours and labor & employment at 7 — contributed 22 hours. Transactional practices added 9. No practice contracted. This is a segment with unusually full canopy coverage: growth is broad, and every branch is pulling upward. The Second Hundred’s continued “moat of demand” in this area remains one of the more durable stories in the legal market.

The most instructive case, however, is the Midsize segment. Midsize firms grew demand 2.6% in Q1, roughly in line with the industry average. However, the source of that growth tells a different story than the numbers suggest. Of 26 new hours per 1,000 worked, the largest contributor was “others” — a category of smaller, specialized practices — at 8 hours. Corporate general added 6, real estate and litigation 4 each. No practice contracted.

What that picture reveals is a segment finding its footing not by competing on volume — where the Second Hundred has structural advantages — or on rate increases, where the Am Law 100 holds the leverage. Midsize firms appear to be carving out a third path: specialization. The tree is not the tallest, and the trunk is not the thickest, but it is filling out its canopy with branches that larger competitors have left largely unattended.

Growth is in the canopy

As the LFFI showed, Q1 2026 produced broad-based demand growth, but the data is clear on one thing: A healthy trunk is not enough. In some regions, the incremental gains came from practices that many firms still treat as secondary — labor & employment and a rotating mix of smaller specialties. In most segments, the firms building fuller canopies are outperforming those relying on a narrower set of core practices.

Midsize firms are perhaps the most visible example of a segment adapting to its conditions. Unable to out-volume the Second Hundred or out-price the Am Law 100, they are finding ways to grow through diversification. Whether that strategy can close the widening performance gap against their larger competitors remains to be seen.

However, the Q1 data suggests that for firms at every level, the next phase of growth is likely to come not from further strengthening what is already strong, but from investing in branches that have yet to reach their full height.

You can download a full copy of the Thomson Reuters Institute’s��Q1 2026 Law Firm Financial Index here

Key takeaways:

• • • Falling behind on worked rates — Midsize firms grew worked rates by just 5.3% in Q1 2026, roughly half the Am Law 100’s 9.8% growth — a structural gap that has widened with every passing quarter.

    • Underinvesting in the tools that will define tomorrow — Midsize firms also invested 6.2% more in tech and knowledge management in the quarter — the lowest of any segment — leaving them at risk falling behind as larger peers accelerate their investment.

    • Sitting out the talent race — With recruiting expense growth at -0.2%, Midsize firms are virtually absent from the lateral market while their closest competitors saw 5.6% growth in their investment.

In Q1 2026, demand growth across all segments landed at 2.7% year-over-year, with ��Midsize firms coming in at 2.6%, essentially in line with the market average and comfortably ahead of the Am Law 100’s 1.2%, according to the Thomson Reuters Institute’s recent Q1 2026 Law Firm Financial Index (LFFI).

Based on this metric, Midsize firms are not underperforming, as they are capturing work at a pace that outstrips the elite tier; however, a deeper look shows a more nuanced story. The Am Law Second Hundred led all segments with demand growth of 3.9%, posting a notable advantage over the Midsize segment. That growth was enough to make up the ground ceded by the Am Law 100 that the Am Law 200 as a whole still managed to outstrip the Midsize segment in terms of demand growth.

That makes the demand story a very mixed one for Midsize firms. While they are holding their own against the very largest firms, the Am Law Second Hundred — Midsize’s most direct competitive set — is pulling significantly ahead on volume. If that gap persists, it could further shut the gates to demand gains. Of course, that would be made all the more impactful because of how rising demand influences firms’ ability to raise rates.

Rates are the most consequential gap in the data

If demand tells a moderately positive story for Midsize, worked rate growth is the point at which the data turns slightly more negative for the segment. In Q1 2026, Am Law 100 firms posted worked rate growth of 9.8%, the highest of any segment by a significant margin. The Am Law Second Hundred recorded 6.9% growth, while the overall market average was 7.0%. Midsize firms, meanwhile, came in at 5.3%.

That is a gap of more than 4.5 percentage points between Midsize and Am Law 100 firms, a magnitude outstripping the entirety of the Midsize segment’s demand gains.

What makes this especially significant is that the gap is not new — one year ago, in Q1 2025, the same hierarchy held, with Am Law 100 firms seeing worked rates grow at 9.4%, Second Hundred firms at 7.1%, and Midsize firms at 5.9%. In other words, the rate divergence between Midsize firms and the rest of the market has been consistent and is widening even further. The end result of this is stark: Midsize firms are growing revenue per hour of work at a pace roughly half that of their Am Law 100 counterparts, and that differential compounds over time into a meaningful profitability disadvantage.

Expenses diverge in the wrong direction

On the expense side of the ledger, the pattern reverses in a way that creates a genuine squeeze for Midsize firms. Looking at direct expenses — the costs most closely tied to delivering client work — Midsize firms recorded growth of 5.4% in Q1 2026, the highest of all three segments. This compares to 4.8% for the Am Law 100 and just 4.4% for the Am Law Second Hundred. That means that Midsize firms are generating the slowest rate growth while simultaneously growing their client-delivery costs the fastest. That combination reflects a textbook margin compression dynamic.

Overhead expenses per FTE tell a different story. Here, Midsize firms showed lower growth at 4.0%, well below the Am Law 100’s 6.7% and the Second Hundred’s 5.8%. On the surface this looks like cost discipline, but it is worth reading carefully: lower overhead investment, especially when coupled with the market’s high tech and talent expenditure pressures may actually reflect forced underinvestment rather than efficiency. Midsize firms may simply have less capacity to expand their infrastructure spending, not less need for it.

Making an opposite bet on talent

Indeed, one of the sharpest contrasts in the “Q1 2026 LFFI ” data involves recruitment expenses. The Am Law Second Hundred is investing heavily in lateral talent, seeing recruitment expense growth of 5.6%. The Am Law 100 has sharply pulled back, growing recruitment costs at just 0.3% — a signal that the largest law firms may be consolidating their existing talent base rather than expanding it aggressively. Midsize firms sit at the opposite extreme, with recruitment expense growth of -0.2%, essentially flat to slightly negative.

This difference is notable because the Am Law 100 and Midsize segments are pursuing fundamentally different headcount strategies. As Am Law firms focus on leaner headcount powered by rates, Midsize firms have finding much more of their revenue growth comes from growing aggregate hours worked by hiring more lawyers. Midsize firms’ decision not to leverage as much investment in this area could signal a shift in strategy, simple cost pressures, or perhaps a greater focus on which areas they spend their recruiting money. Whichever the driver, it’s a sizeable shift across a segment that’s already feeling pressure across multiple facets of their business.

The compound effect of this divergence

The “Q1 2026 LFFI” data highlights several reinforcing challenges facing Midsize firms: slowing demand and lagging rate growth, the highest direct expense growth but the lowest technology investment, and minimal lateral recruitment investment. While no single factor is critical, together these divergences show a widening gap between earnings and costs.

Of course, this is not to say that Midsize firms are going bankrupt — far from it. Midsize firms’ profitability, on average, is growing at a solid pace as demand and rates continue to power them forward, even as expenses weigh on their numbers.

What may be more concerning is what this means for the future potential of Midsize firms, especially as the market bifurcation grows and the Am Law firms increasingly pull away. As this continues, it’ll become harder and harder for Midsize firms to break into those ranks, compete for talent, and compete for the kind of bet the company work that is some of the most profitable in the legal industry. Reversing this course isn’t about Midsize firms’ 2026 results; rather, it’s about what they can achieve in 2030, 2040, and beyond.

You can download a full copy of the Thomson Reuters Institute’s Q1 2026 Law Firm Financial Index here

Key findings:

• • • Pricing and demand are exceptionally strong, but profits aren’t keeping up — Despite worked rate growth reaching above 12% for the largest of the Am Law 100 firms and demand growth hitting almost three-times its historical average, the LFFI landed at a flat 55, its own long‑run historical average.

    • Rising costs, falling productivity, and geopolitics are quietly offsetting gains — Overhead expenses climbed, productivity slipped back into contraction, and a widening performance gap between large firms and the rest dragged on overall results; meanwhile, the Iran war appears to be dampening demand on the edges of both transactional and counter-cyclical work.

    • The market is splitting sharply by segment — Am Law 100 firms continue to drive pricing power and lead technology investment, while Midsize firms have seen rate growth slow, demand lag, and costs rise faster than revenue, all reinforcing an increasingly scale‑driven competitive divide.

The Thomson Reuters Institute’s Law Firm Financial Index (LFFI) for the first quarter of 2026 landed at 55, exactly matching the long‑run historical average since the Index began tracking the market in 2006. On its face, that may sound unremarkable; but dig one layer deeper, and Q1 2026 becomes one of the more puzzling quarters we’ve seen in years.

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Q1 2026 Law Firm Financial Index

Let’s start with the inputs. Am Law 100 firms pushed worked rate growth to almost 10%, building on an already record‑setting 2025 and marking one of the strongest pricing environments in recent memory — and at the very top of the market, the largest law firms cleared 12%-plus rate growth. Meanwhile, demand clocked in at 2.7%, nearly triple the industry’s long‑run average.

Clearly, these are not average conditions by any stretch. And yet, the LFFI score — a composite output of law firm financial performance — remained stubbornly ordinary.

So, what’s eating the gains? It turns out that the answer is multifold. For example, the report cites climbing overhead expenses, productivity that has slipped back into contraction after six months of gains, and a growing performance gap between the largest firms and everyone else — all joined forces to drag down the LFFI score.

On top of that, a new geopolitical variable — the ongoing war in Iran — weighs heavily, darkening the storm clouds further. Early indicators suggest the conflict is blunting both sides of demand at once, the report notes, freezing both the transactional M&A work that thrives on confidence and the counter-cyclical restructuring work that thrives on distress. When both the upside and downside stall simultaneously, strange results likely will follow.

The segments’ strategy split

Indeed, one of the clearest stories of Q1 is how sharply law firm segments are splitting apart. After years of moving largely in lockstep, pricing strategies diverged in Q1. Am Law 100 firms, for example, leaned hard into rate growth, while Midsize firms slowed their rate growth, marking the first deceleration in rate growth for any segment since 2021. Meanwhile, the Second Hundred held steady, neatly threading the middle.

This nuance matters. Large firms continued raising standard rates faster than worked rates, accepting deeper discounts to move the prices clients paid higher. Midsize firms did the opposite — allowing standard rates to lag while negotiated rates rose — signaling restraint. Midsize firms’ strategy may have been to capture price‑sensitive demand migrating down‑market; but in practice, it hasn’t worked. Midsize firm demand growth now trails the Am Law 200 average, expenses are accelerating faster than revenue, and productivity per lawyer is declining. As a result, profit growth for the segment is running at roughly half the pace of its Am Law peers.

Rain in the forecast?

Demand, meanwhile, still remains above historical norms, even as a few raindrops are starting to fall. While several practice areas contributed meaningfully, the mix of transactional and counter‑cyclical practices are growing at nearly the same pace, signaling not balance, but simultaneous deceleration. Add in tough year‑over‑year comparisons against early‑2025’s demand surge, and the growth picture going forward becomes more stormy.

As the report makes clear, the takeaway from Q1 is not that the market is in trouble, but rather that momentum is slipping under the surface. A score of 55 isn’t a storm warning siren; it is, however, an odd resting point for a market with inputs this strong. The question for the legal market moving forward is simple: Is this just a passing sprinkle — or the first sign of a heavier storm?

You can download

a full copy of the Thomson Reuters Institute’s “Q1 2026 Law Firm Financial Index” by filling out the form below:

Key takeaways:

• • • Demand slowdown reverses LFFI gains — The LFFI’s Q4 2025 dip reflects a modest demand slowdown, marking a shift from rapid post‑pandemic rebound to a more stable, steady market.

    • Transactional practices plateaued while counter-cyclical regain momentum — Transactional practices leveled off while demand in the litigation, bankruptcy, and labor & employment practice areas accelerated, driven by rising disputes, regulatory pressure, and workforce complexities.

    • Clear opportunity for strategic realignment — Law firms may be able to shift their staffing toward growing counter‑cyclical areas, strengthening their pricing discipline and refining their recruiting processes.

After two consecutive quarters of improvements in the ��������® Institute’s Law Firm Financial Index (LFFI) score, the fourth quarter of 2025 marked a modest reversal in which it fell, albeit slightly to 61. The key driver behind this decline was a deceleration in demand that was meaningful enough to pull the overall score down and may signal that the market is moving into a more normalized rhythm — less snapback growth and more steady performance.

To understand what this means in practical terms, it helps to look beneath the headline numbers and examine not just what happened in Q4 2025, but also over the last two years. Then, a clear narrative emerges: Transactional work — M&A, corporate general, real estate, and tax — was powering the market in Q4 ’24 but largely plateaued in Q4 2025. Meanwhile counter-cyclical practices — litigation, bankruptcy, and labor & employment — regained momentum during the same timeframe.

Put differently, the practices that powered growth in the last year are fading as measured against their own baselines, while those practices that performed less strongly then are now starting to take the lead for the legal industry.

Practice level demand dynamics

By applying a magnifying glass to each transactional practice’s behavior over the past three quarters, one can identify a few important contrasts. The practice that stands out for its lowest growth in Q4 2025 is tax — and, in fact, across the final quarters of the last three years (even when it had a good performance in early 2025), that momentum didn’t translate to the end of the year. This indicates that tax has constantly posted the weakest demand growth, bottoming out at -0.9% in Q4 2023, when it was again the practice with the lowest growth. Even in the Q4 2024 — a stronger year for most practices — tax grew only 1.5%, well below both its transactional and counter-cyclical peers.

This persistent underperformance may reflect several factors, such as increased internalization of routine tax work by corporate tax departments, pricing pressure in highly standardized matter types, and slower deal flow in M&A reducing ancillary tax activity. Whatever the cause, tax’s muted trajectory has had a dampening effect on overall transactional momentum and has acted as a drag on top-level demand growth.

On the other side of the room, counter-cyclical practices strengthened in Q4 2025 after a softer Q4 2024, nearly reaching the same growth that they presented in Q4 2023. Collectively, these practices rose to around 3.2% in Q4 2025, compared to about 1.5% growth in Q4 2024. This represents a true rebound after an unusually strong 2023, which was likely caused by lingering pandemic-related effects and the period’s surge in inflation.

Litigation leads the pack

Litigation provides the clearest example of this resurgence. During the Q4 2025, litigation led with roughly 4.3% growth, compared to 2.4% in Q4 2024. Indeed, the practice closed 2025 with renewed momentum, making it the standout in performance among major practices.

Litigation’s acceleration in late-2025 suggests that court systems have fully normalized, backlogs have largely cleared (in relative terms), and organizations are encountering a more contested operating environment. Regulatory scrutiny, geopolitical risk, supply chain disputes, and workforce-related conflicts all contribute to a litigation profile that is less dependent on economic cycles and more tied to the complexity of today’s business environments.

By contrast, after bankruptcy demand growth surged to 6.4% growth at the height of the pandemic recovery in 2023, the practice area experienced a dramatic cooldown the following year, falling to 0.4% just 12 months later. However, bankruptcy recovered modestly to 2.8% in Q4 2025, although still far below the extraordinary levels seen during its previous spike.

Taken together, these patterns suggest that corporate clients may be contending with a broader set of pressures — regulatory instability, workforce management complexity, and the downstream effects of post-pandemic backlogs — that could continue to generate steady legal demand.

Counter-cyclical trends reflect opportunity, not just reactive demand

The upswing in demand growth for counter-cyclical practices is not necessarily a sign of economic turbulence, however. Indeed, it shows the market can be stable and still produce more litigation, it can be cautious and still require restructuring advice, and it can be steady and still demand intensive employment support. The fact that transactional demand continues at a solid, albeit slowing pace, shows that this is not necessarily the recession-boosted practices that are driving law firm performance.

In fact, in a market in which transactional demand has stabilized and disputes and compliance work is rising, many law firms can use the moment to better align their operating model with the practice areas in which momentum is building and by aligning with actual demand.

For example, as litigation, bankruptcy, and labor & employment areas see higher demand growth, a firm may benefit from adding capacity in those areas, improving staffing leverage, and preventing partner bottlenecks. Meanwhile, steady but flattened transactional demand could call for disciplined, pipeline‑based hiring.

The practices that powered growth in the last year are fading as measured against their own baselines, while those practices that performed less strongly then are now starting to take the lead for the legal industry.

In addition, lower demand for transactional practices can represent an opportunity for law firms to refine their recruitment processes, as recruiters can take the time to seek those candidates whose skill sets offer added value. Prioritizing the hiring of candidates who bring fresh ideas and technological capabilities to support the tech-driven evolution of legal services may be the push some law firms need to meet the expectations of clients that are increasingly demanding greater value for their dollars.

This does not mean transactional work should be deprioritized, however. Instead, firms should adopt a dual‑track strategy: Optimize and streamline transactional capacity for efficiency, while strategically expanding counter‑cyclical teams in the areas in which demand is accelerating.

Making the strategic choice

On the face of it, it seems that many law firms face a strategic choice between doubling down on counter‑cyclical practices or continuing to prioritize transactional work. Current demand performance suggests counter‑cyclical areas offer the clearer near‑term opportunity — they are growing, resilient, and driven by structural forces such as regulatory scrutiny, workforce disputes, geopolitical risk, and more complex compliance environments.

Further, this environment elevates the importance of pricing discipline. As demand normalizes, clients become more price‑sensitive and will expect efficiency and transparent staffing. Litigation and labor & employment may have more pricing power today, but disciplined pricing across all practices is critical for margin stability.

Indeed, the widening gap between transactional and counter‑cyclical practices signals a market in transition. The opportunity for firms lies in balancing these dynamics and aligning staffing, pricing, and operations to navigate uneven growth and capture value in a more complex legal environment.

You can download the��Thomson Reuters Institute’s Q4 2025 Law Firm Financial Index��here

Key takeaways:

• • • Worked rate momentum is slowing at a crucial time — Q4’s 7.1% growth in worked rates, while historically strong, is the smallest quarterly increase of 2025, indicating the rate‑driven profit engine may not be endlessly responsive as firms approach 2026.

    • Elasticity at its strongest and most vulnerable — Since late-2022, worked‑rate growth has translated almost one‑for‑one into law firm profitability, but even a slight softening in rate momentum now poses outsized risks as client budgets tighten.

    • History shows the system has limits — The 2021– ‘23 period demonstrated that rate growth alone cannot sustain profitability. Today’s Formula 1‑level responsiveness boosts gain quickly enough, but it can leave firms more exposed if the market changes direction.

Even as the winds shift, law firms still managed to sail into a strong finish in the fourth quarter of 2025; but beneath that smooth landing, the current was already changing direction. As the ��������® Institute’s Law Firm Financial Index (LFFI) edged down 2 points to 61 in Q4, a small but notable reversal after a full year of steady gains. The dip was driven largely by cooling demand growth, and while modest in absolute terms, it hints at a broader realignment that may be taking shape just as the industry steps into 2026.

Unsurprisingly considering its role in profitability, much of this shift comes down to worked rates and their relationship to profitability — a relationship that, in recent years, has been remarkably tight. Yet Q4 showed the first signs that the market may be entering a more complicated phase.

The F1 machine

In the previous decade, the rate-driven profit engine behaved more open, stable, predictable, and generally comfortable — albeit with one important limitation. It didn’t offer much acceleration. In fact, most of the higher‑velocity gains only began to appear as the industry approached the pandemic era. Then, when the pandemic hit and the system started to strain, with any acceleration felt weighed down and less responsive as firms navigated uneven pavement and constant adjustments.

Beginning in 2023, the industry shifted again — this time with the acceleration power of a Formula 1 race car. Rates became extraordinarily efficient in being translated into profitability. In recent quarters, profit rates have seen significant growth, so when firms pressed the accelerator, the needle moved quickly.

However, an F1 car demands precision. The faster it goes, the less margin there is for error. Today, the market is operating in a phase in which rate increases translate to profit gains at incredible speed.

A decade of history reveals a crucial pattern

The chart above broadens the lens to cover more than 10 years of data, bringing an important nuance into focus. The relationship between worked rates and profitability has not always been as linear — or as reliable — as it has in the most recent period. From Q1 2015 to Q4 2021, firms were driving at a manageable pace: For every 1% increase in worked rates, there was an approximate 0.7% growth in profit. Indeed, most of the historical data aligns with the intuition that higher rates bring higher profits.

However, between Q4 2021 and Q1 2023, the pattern bends in the opposite direction. Rate growth accelerated sharply, yet profitability declined. At first glance, it appears counterintuitive, but in racing terms, the track conditions had deteriorated sharply, making speed alone not just ineffective but actually risky. This was a period marked by elevated inflation, rapid expense growth, compensation escalations, and operational volatility across many law firms.

The logic was simple: Even aggressive rate increases couldn’t fully offset the pressure on margins. Moreover, in such a strained environment, attempts to raise worked rates by 1% led to a nearly 0.9% decrease in profits — almost a complete reversal. As a result, firms were recording some of their highest worked rate growth levels in nearly a decade, yet profitability on a rolling 12‑month basis dipped into negative territory and remained there for several quarters.

The goal of discussing this period isn’t to argue that rate increases backfired. They technically didn’t. Rather, the lesson is more subtle… and more relevant today: Rate growth is essential, but not omnipotent. It cannot solve every profitability challenge on its own.

The more recent elasticity story: Rates and profit move together

The LFFI’s softening in Q4 was influenced not only by decelerating demand growth, but also by a subtle easing of rate growth’s momentum. Worked rates grew 7.1% for the quarter — as we said, still strong, but the slowest quarterly increase of 2025. In a different era, this might have been a footnote; however, since the pandemic, rate growth has become the central pillar supporting law firm profitability. Where productivity and demand once balanced the equation, rates now serve as the primary driver. This means that any moderation, even a slight one, carries outsized significance.

The chart above illustrates this dynamic clearly. Without belaboring the mechanics, each point represents one quarter, with worked rate growth on one axis and profitability on the other, both on a rolling 12‑month basis. The clustering shows a close, consistent linkage over the last several years, showing that as rate growth pushed steadily upward, profitability almost invariably followed.

One takeaway stands out, however. Since late 2022, every 1% increase in worked rates has corresponded with roughly a 0.9% increase in profit growth, contrasting sharply with the patterns observed during the pandemic period. That kind of elasticity is rare in the history of the legal industry, and it helps explain why 2025 was such a profitable year across the market. Firms exceeded a two‑decade threshold in rate growth, achieving average increases near 7% and double‑digit gains at the top end.

Again, however, that relationship cuts both ways. If rate growth were to stall — or if clients were to push back more aggressively on rates — the profit engine that has powered firms through much of the last three years could lose momentum quickly. The early signs of that tension were already present in Q4, and they could intensify in 2026. Corporate budgets are under acute pressure, and counter‑cyclical demand often rises during economically turbulent periods, tightening constraints even further.

Put simply, the market is showing early signs that clients’ ability to absorb further rate increases may clash with firms’ dependence on that rate growth to sustain their profit growth. And the years of historical data serve as a reminder that this relationship isn’t unbreakable, and that even well‑calibrated systems can behave unpredictably when conditions shift.

The real question heading into 2026 is not whether firms can continue pressing the accelerator, but whether they can do so safely. At this Formula 1 speed, maintaining profitability isn’t just about adding power — it’s about navigating a track that is becoming narrower, more volatile, and far less forgiving.

You can download the Thomson Reuters Institute’s Q4 2025 Law Firm Financial Index here

Key takeaways:

• • • LFFI dip driven by slowing demand — The small dip in the LFFI was driven almost entirely by decelerating demand growth, which slowed to a still-strong 3.3% in Q4.

• • • Changing of the guard��— M&A work slammed on the brakes while counter-cyclical practices surged, with bankruptcy re-emerging as a major engine of demand growth — a shift that often signals broader economic turbulence ahead.

    • Rate increases, client pressure builds��— Firms fielded strong rates at the beginning of 2025, which helped power profits; however, with client budgets stretched, firms must demonstrate value to justify their higher rates.

Law firms ended 2025 in an enviable position, even as the Thomson Reuters Institute’s Law Firm Financial Index (LFFI) score dipped 2 points to 61 for the fourth quarter of 2025, snapping a yearlong upward streak as demand growth slowed from its Q3 pace. The final quarter of 2025 delivered one of the strongest finishes in recent memory, with profits surging and margins cresting above 40%. Yet even as the champagne flows, the winds may already have begun to shift.

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Q4 2025 Law Firm Financial Index

The LFFI’s slight decline was driven almost entirely by decelerating demand growth, which slowed to a still strong 3.3% in Q4 from 3.9% in Q3. More telling than this headline figure, however, was a quieter changing of the guard beneath the surface.

Transactional practices began cooling from their Q3 peaks, with M&A work falling 5 percentage points from its prior pace. Filling the void, bankruptcy work surged in Q4, particularly in December, as counter-cyclical practices re-emerged as the dominant engine of demand growth. If this signals a greater shift for the United States economy, as it often does, law firms may find something far more important than just their demand threatened — their rates could come under pressure.

The rate question

Rate increases have historically been the primary power behind law firm finances, and 2025 proved no exception. Firms broke through a two-decade-old threshold, with the average firm seeing 7% growth in worked rates. Since the end of 2022, every 1% increase in worked rate growth has correlated to about a 0.9 percentage point increase in profits.

Where things may become less comfortable is the increasing potential for client pushback. Legal services buyers’ budgets are under more pressure than ever, and 2026’s new rate increases — expected to be as strong or stronger than 2025’s — are already in effect. If the legal industry continues raising rates at this pace without delivering corresponding increases value — and communicating that value to clients — they may see clients shift work to cheaper firms or move more legal work in-house entirely.

We’ve seen this movie before, in 2008 immediately after the global financial crisis, and the result was a stagnant decade of law firm growth.

Preparing for changing weather ahead

The good news is that none of this spell immediate trouble, and there is more than enough time for firms to avoid the worst of the long-term threats. A brighter future, one in which firms use advanced AI tools to deliver more value per hour and thus strengthen their surging rates even further, is just as possible.

By effectively locking in their revenue before the winds shifted and practicing disciplined expense management, law firms have bought themselves some breathing room to invest in technology and talent, at least in the short term.

For law firm leaders, this is a moment for preparation, not for a victory lap. The firms best positioned for whatever weather lies ahead will be those that solidify their efficiency gains and demonstrate value now, ensuring that when the next wind shift comes, they’re positioned not just to survive, but to thrive.

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a full copy of the Thomson Reuters Institute’s “Q4 2025 Law Firm Financial Index” by filling out the form below:

Key insights:

• • • Rate growth remains at all-time highs — While this is good news, firms also need to plan for what may lie ahead when that growth cools.

    • Potential financial pressures are accelerating��— Strong demand and rates are driving growth in revenue and profitability, but firms need to keep an eye on realization and expenses which are flashing troublesome signs.

    • A strong 2025 brings no promises for 2026 — This year’s momentum is an opportunity to plan for the next shift in the market.

Many law firms may be preparing to pop champagne corks in a few weeks to celebrate what is shaping up to be a record-setting 2025. As firms close the books on the year, however, it may be prudent to not only celebrate, but also to prepare themselves for potential headaches that could start in the new year after the celebrations die down.

The Thomson Reuters Institute’s recent Law Firm Rates Report 2026 laid out the paradox that is fueling the end-of-year party vibes: Law firms now are enjoying unprecedented pricing power and demand growth; but at the same time, the underlying economics reveal potentially destabilizing pressures that may await them in 2026. And the recent Law Firm Financial Index (LFFI) for the third quarter of 2025 found, those pressures continue to intensify.

Tectonic pressures growing

While the Rates Report raised fundamental questions about what’s driving rates higher and why long-held beliefs about what constitutes better rate performance may be incorrect, the Q3 LFFI likened this year’s surging demand and rate growth to rising tectonic pressures that can both lift mountains but also fracture previously stable ground.

Firms have arguably never had it better when it comes to rates. Worked rates have climbed steadily for the past four years, reaching levels that are not only historical highs, but are also easily outpacing inflation, representing genuine growth in pricing power. Coupled with strong demand, many firms are experiencing a windfall in revenues and profits this year.

And the upward momentum continues to gain strength. Demand growth accelerated to 3.9%, according to the Q3 LFFI, even as worked rates held steady at Q2’s all-time high of 7.4%.

Hiding cracks in the foundation?

Beyond questions about whether the current growth in demand and rates is sustainable, there are signals that the impressive performance may be masking warning signs of potential trouble ahead.

First, expenses are now rising faster than rates, and expense growth is accelerating. Direct costs are up 8.5% year-over-year, while overhead expenses climbed 7.5%, according to Q3 LFFI data. This is an extremely risky proposition because expense growth is generally sticky and hard to control, especially during intense growth periods because firms feel they need to continue feeding the human capital and overhead infrastructure that is driving growth.

However, history teaches a harsh lesson: Revenue can vanish overnight, but expenses rarely do.

Second, realization is wobbling in troubling ways. Firms saw an unseasonal downtick in collection realization in Q2, counter to normal seasonal patterns in which realization typically improves throughout the year. This wobble may feel uncomfortably familiar to anyone who survived the aftermath of the global financial crisis that began in 2007. While Q3 showed some recovery in realization, the long-term trend since 2021 has been a slow decline, which means that despite record standard rate increases, the percentage of those rates actually collected continues to erode.

Third, work continues to shift down market. The Rates Report noted that corporate clients with annual revenues of more than $10 billion saw their effective paid rates decline at a double-digit rate in 2025, even as law firms reported average worked rate increases of 7.4%. This reflects how price-sensitive matters had been shifted towards smaller, lower-cost providers while the largest firms seek to retain higher value work.

The challenge then becomes for law firms to identify which matters justify premium pricing and which are vulnerable to downstream migration. Strategic partnerships with smaller firms or alternative legal providers could potentially be an avenue for larger firms to retain client loyalty while protecting their margins.

Looking ahead

While many law firms are enjoying the fruits of a bountiful 2025, it’s not too early for firm leaders to turn their attention to 2026 and determine what their strategies will be. This is no time for complacency or an assumption that next year will merely be a replay of 2025. Instead, firms need to start mapping contingency plans in case demand or pricing falter, expense growth accelerates further, or work continues to flow downstream to lower-cost law firms.

The flashing lights in the distance may turn out to not be celebratory holiday displays but rather caution signs that lie in wait for the year ahead. The warning lights aren’t showing red yet, but they’re definitely moving from a festive green to a cautionary amber.

You can download a copy of the Thomson Reuters Institute’s��Law Firm Rates Report 2026 here

Key points:

• • • Southwest strength spans all practices — Firms in this region show balanced growth, with labor, litigation, and M&A practices leading the way.

    • Southeast signals dual priorities — Transactional practices such as corporate and real estate remain strong, while bankruptcy is becoming increasingly relevant.

    • Tailored strategies and flexibility drive success — Firms that align with regional strengths while remaining adaptable to shifting economic conditions may be best positioned to thrive in an uncertain future.

Despite persistent economic and political instability in the United States, law firms are demonstrating remarkable resilience. The ��������® Institute’s Law Firm Financial Index (LFFI) climbed to 63 points the third quarter, signaling stronger-than-expected performance across the legal industry. This increase reflects a surge in demand, particularly among transactional and counter-cyclical practices, even as broader market volatility continues to raise concerns.

While the overall story for law firms is one of growth, further insights lie beneath the surface, especially in the regional variations that reveal how different parts of the country are responding to the current uncertainty. Two regions, in particular, stand out for their contrasting yet equally compelling narratives: the Southwest and the Southeast.

The Southwest: A model of stability and counter-cyclical strength

The Southwest region of the US has emerged as a beacon of growth in an otherwise uneven market. It is the only region that did not experience contraction in any major practice group in Q3, a remarkable achievement given the economic backdrop. This broad-based strength suggests that firms in the Southwest could be benefitting from a unique combination of factors, including geopolitical ripples and robust client demand across multiple sectors.

Labor & employment practices have experienced a notable upswing. This surge reflects the heightened complexity of workforce issues during times of uncertainty, from regulatory compliance to disputes over layoffs and restructurings. Litigation similarly continues to strengthen, underscoring the strength of counter-cyclical practices in this part of the country.

The mergers & acquisitions practice also has shown remarkable momentum, signaling that businesses in the Southwest are not shying away from strategic transactions despite broader economic challenges. In fact, this resilience may reflect structural and political dynamics. Southwestern states — often aligned with pro-business policies — could be benefiting from preferential treatment under an administration that favors red states over blue states. Such advantages may translate into stronger economic performance and, consequently, increased legal spending in transactional practice areas.

The Southeast: Transactional momentum amid signs of stress

The Southwest, on the other hand, reflects a narrative of steadiness, as the region maintains a consistent performance across key practice areas. For example, bankruptcy has emerged as a key area of growth in the Southeast, making this region unique in showing increased activity in insolvency matters.

This duality — strong corporate and real estate activity alongside rising insolvency work — highlights the complexity of regional economic conditions. For law firms, it also underscores the importance of maintaining a balanced portfolio of practices to allow them to navigate both opportunity and risk.

The Southeast’s performance also raises questions about the durability of its transactional momentum. Will corporate and real estate growth continue if bankruptcy trends accelerate? Will bankruptcy demand decline? These are critical considerations for firm leaders in this region as they make strategic plans for the months ahead.

Regional divergence and its implications

The contrast between the Southwest and Southeast illustrates a broader truth: Regional dynamics matter, while national averages can obscure the localized realities that shape client demand and law firm performance. In the Southwest, the absence of contraction across any of the major practices suggests a level of economic resilience that other regions may struggle to match. In the Southeast, the coexistence of transactional strength and financial distress may indicate a more volatile environment in which opportunities and risks are closely intertwined.

For law firms, these patterns carry significant strategic implications. Firms operating in the Southwest may prioritize investments in labor & employment and litigation capabilities to sustain counter-cyclical strength, while continuing to capitalize on M&A opportunities. In the Southeast, firms may need to adopt a dual strategy — supporting transactional practices while expanding expertise in bankruptcy and restructuring to meet rising demand. It’s critical to note that current growth patterns do not guarantee long-term demand.

Navigating an uncertain future

As law firms plan for the next quarter and beyond, the question is not whether regional differences will persist but how firms can best adapt to them. Continued economic and political volatility could sustain demand for counter-cyclical practices nationwide, while transactional activity may fluctuate based on business confidence and capital availability.

Those law firms that succeed will be those that embrace agility and regional specialization. Understanding local economic drivers, anticipating shifts in client needs, and aligning resources accordingly will be critical.

You can download a full copy of the Thomson Reuters Institute’s Q3 2025 Law Firm Financial Index here

Key takeaways:

• • • Growth isn’t free — While direct expenses have stabilized, overhead expenses continue to climb. These costs often don’t fall as fast as demand, creating long-term financial pressure if demand should contract.

    • Different strategies have same risk — Am Law 100 firms invest steadily, while Second Hundred firms move variably, and Midsize firms tread cautiously. Despite these different approaches, all segments are raising expense levels that may outlast demand spikes.

    • Expense stickiness is a strategic challenge — Law firms must plan beyond the current boom. Expense stickiness means costs may linger even when work slows, making smart hiring, tech investment, and cost control essential in order to weather future downturns.

Even as tectonic pressures continue to mount, law firms reached new heights in the third quarter of 2025. The ��������® Institute’s Law Firm Financial Index (LFFI) rose solidly, driven by a historic spike in legal demand even amid rising global instability. However, beneath this surge lies a quieter, more persistent challenge, and one that could shape the financial future of firms far more than demand alone: Expense stickiness.

This concept — how higher expenses linger even when demand drops — isn’t new, but it’s becoming increasingly relevant. The latest LFFI data reveals that while firms have made progress in managing associate compensation, they’ve yet to fully address how to handle compensation for other lawyers. Demand growth has been steady throughout 2025 thus far, but if firms want to make a meaningful impact on revenue, they must broaden their focus. Compensation strategies for senior talent and other lawyers as well as for overhead costs all play a role in shaping long-term financial health.

Currently, law firms are facing rapidly rising costs due to headcount growth and increasingly expensive senior talent, with direct expenses rising steadily and overhead — especially spending on technology and knowledge management — accelerating even faster. While associate pay hasn’t surged as it did during the 2021–22 talent wars, firms’ overall expense growth remains high. This sustained investment in talent, tech, and knowledge management — now in its third straight year — is a reminder that while demand can quickly vanish (as seen during the 2022–23 downturn) expenses tend to persist, creating long-term financial risks for firms.

Contrasting growth strategies: How the different segments are managing expenses

The different law firm segments are attempting to manage this expense growth in a variety of ways. For example, Am Law 100 firms have moved confidently and consistently. Their associate compensation rose steadily throughout 2024, peaking in early-2025 before leveling off. The segment’s direct expenses followed a similar arc, climbing quarter by quarter to lead the market. Overhead costs doubled their growth pace during this period, signaling sustained investment. Indeed, the largest law firms didn’t just spend more, they did so with consistency.

Meanwhile, the Am Law Second Hundred firms pushed hard, but their path was less predictable. Compensation for associates and direct expenses surged, especially in late-2024, suggesting bursts of hiring or reactive pay moves. Overhead spending fluctuated, with sharp rises and dips that hint at tactical recalibrations as the year evolved.

Midsize law firms took a more responsive and restrained route even as they pushed hard to bring on more lawyers. Associates’ compensation and direct expenses grew modestly, with a notable dip in mid-2025. Overhead costs remained low and erratic, reflecting tighter budgets and a need for agility. Their spending patterns suggest a careful balancing act — responding to market pressures without overextending as they have in the past.

Taken together, the data reveals a broader industry rhythm. Across all segments, 2024 was a crescendo — costs rose in lockstep across both direct and overhead expenses. Yet, the first quarter of 2025 emerged as a pivotal moment, representing the crest of the wave and the peak of investment. What followed is a pause, a plateau, a moment of reflection. The largest firms continued to push forward, while others recalibrated. Now, things seem to again be accelerating and building atop even the heights of 2024.

Expense stickiness: Demand vs. the lag in expenses

In the graphic below, the lower, dark line tracks year-over-year demand growth. As you can see, it climbs sharply in early 2021, reflecting a post-pandemic surge in legal work; however, by late 2022, demand drops dramatically.

It is these tremors that shake the legal industry, chronicling those times when client activity slows and demand falls. Unlike demand, however, expenses don’t fall as quickly or as deeply. This lag is the essence of stickiness — costs, such as salaries, technology, and other expenses don’t disappear just because the work dries up.

The yellow bars in the graphic represent the stickiness metric, which spikes downward during demand slumps, as seen in late-2022, showing that expenses barely budged, even as demand dropped sharply. In other words, law firms were still paying for their top talent, tech investment, and infrastructure, despite having less work to support those costs.

As the graphic shows, as demand began to recover in 2023, expenses stabilized, and the stickiness metric returned to normal levels. The lesson is clear, however; when demand vanishes overnight, expenses rarely do. That means it is imperative that law firms plan for these moments, ensuring they have strategies to weather downturns without being hung up by persistent costs.

Why this matters: Risk & resilience

This story isn’t just about numbers — rather, it’s about risk and resilience. Law firms operate in a world in which demand can be unpredictable, but expenses are stubborn. Understanding this dynamic helps law firm leaders make smarter decisions about hiring, technology investments, and financial planning. Expense stickiness is more than a financial quirk; it’s a strategic challenge that firms must confront head-on.

You can download a full copy of the ��������® Institute’s Law Firm Financial Index for Q3 2025 here