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 ¶¶Òõ³ÉÄê® 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 theÌýThomson Reuters Institute’s Q4 2025 Law Firm Financial IndexÌýhere

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 ¶¶Òõ³ÉÄê® 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 guardÌý— 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 buildsÌý— 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.

Jump to ↓

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.

You can download

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 acceleratingÌý— 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’sÌýLaw 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 ¶¶Òõ³ÉÄê® 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 ¶¶Òõ³ÉÄê® 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 ¶¶Òõ³ÉÄê® Institute’s Law Firm Financial Index for Q3 2025 here

Key takeaways in Q3:

• • • Strong Q3 performance — The Law Firm Financial Index (LFFI) score increased by 8 points compared to Q2 2025, highlighting a quarter of robust demand and industry resilience.

    • Client-driven demand shift — Midsize law firms led the increase in transactional practices, while Am Law Second Hundred firms dominated counter-cyclical growth, driven by large corporate clients shifting work to lower-rate providers.

    • Strategic caution advised — Persistent risks, rising costs, and unresolved long-term challenges mean firms must remain cautious and strategic.

Law firms demonstrated remarkable performance through a geopolitically tense third quarter of 2025, as clients increasingly sought legal guidance to navigate market complexity and global uncertainty. This surge in demand propelled the ¶¶Òõ³ÉÄê® Institute’s Law Firm Financial Index (LFFI) score to 63 for the third quarter, marking a notable rise from earlier in the year.

Jump to ↓

Q3 2025 Law Firm Financial Index

Yet, as a closer look reveals, the industry’s strong performance sits atop tectonic forces that, while driving change, also carry the potential to disrupt long-term stability.

Firms on shifting ground

At the core of this shift is a surge in client activity that’s breaking records — and coinciding with a period in which the price for legal services is rising like never before. Transactional practices are thriving, with mergers and acquisitions, corporate law, real estate, and tax practices seeing a marked uptick in demand. Midsize firms have stepped into leadership roles within these practices, demonstrating agility and resilience as they capture fresh business opportunities and respond swiftly to evolving client needs.

However, this isn’t just a story of expansion. The competitive landscape is being redrawn as clients reassess their legal partnerships. Many are prioritizing value and flexibility, shifting work to firms that offer more competitive pricing — a trend we’ve noticed for the past year or so. This is obviously working to the advantage of those firms seeing significant demand growth as a result, but the more expensive law firms are also seeing boosted performance, as the trend helps them secure higher rates on the work they do maintain.

In response to this rising demand, many firms — especially those in the Midsize and Second Hundred tiers — are investing heavily in talent and technology. Even as the cost of hiring continues to climb, some firms are broadening their search beyond traditional legal roles to include specialists in technology, data, and knowledge management. These strategic hires are aimed at boosting operational efficiency and enhancing client service in an increasingly AI-driven environment.

With overhead rising and competitive pressures mounting, law firms must strike a careful balance between strategic investment and disciplined cost management.

Emerging fault lines of legal strategy

As the Q3 2025 LFFI report shows, the current environment is marked by both promise and risk. Economic and geopolitical uncertainties loom large, and the next shake-up could be just around the corner. Law firms are enjoying a period of robust growth certainly, but the ground beneath them remains unsettled. The ability to navigate uncertainty, anticipate change, and respond with agility will be critical in the months ahead.

For law firm leaders, partners, and strategists, this is a moment to reflect on the lessons of the past and to prepare for the challenges of the future. The industry rewards those who can balance ambition with caution, invest wisely in talent and technology, and stay attuned to the evolving needs of clients. A firm’s success will depend on its leaders’ ability to rise above the turbulence and seize the opportunities that lie ahead.

As the legal landscape continues to shift, one thing is clear: The forces reshaping the industry demand careful navigation, and firms must now approach the path forward with greater caution and strategic foresight.

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Key findings:

• • • Expense growth is accelerating — Both direct and overhead costs are rising faster than in Q1, posing a potential risk if revenue growth slows.

    • Law firms are adapting strategically — With Am Law 100 firms leveraging pricing power over headcount expansion, other firm segments are investing in technology and smarter resourcing to manage costs.

    • Overhead spending trends are shifting — Increased investment in tech and benefits, and a decline in occupancy costs are signaling a move toward hybrid work and operational efficiency.

The story of 2025 has been the ongoing trade war, which has driven uncertainty around global economic and policy matters. Coupled with rising geopolitical instability, the situation has left economists and business leaders holding their breath. Yet the US legal market’s second quarter was unexpectedly calm — and surprisingly prosperous, according to the Thomson Reuters Institute’s Law Firm Financial Index for Q2, which rose as more clients turned to their outside counsel for guidance.

This rise can be attributed to an increase in legal demand of 1.6% and robust worked rate growth of 7.4%. Together these gains offset a 1.3% productivity decline. While these topline gains are encouraging, law firm leaders should remain vigilant on the expense side.

Both direct and overhead expenses saw a modest increase in growth this quarter compared to Q1, rising to 7.9% and 6.6% respectively, continuing a trend underway since the second half of 2024. Revenue growth is still outpacing expense growth, keeping profits strong, but any slowdown in revenue could leave firms in a lurch, just like we saw in 2022.

After the robust level of demand and rate growth of the first half of 2025, an increase in spending might have been expected heading into the rest of the year, as law firms continue to chase the opportunities in front of them. However, the broader instability shows no signs of easing, suggesting continued volatility across the global market that will eventually impact firms.

This may leave firms stuck between a rock and a hard place — the strength of the legal market offers opportunities for growth; however an increase in spending in that push for growth could leave firms overexposed to a slowdown if clients may become reluctant to spend. This means firms should consider ways of slowing expense growth in other areas, in order to be able to continue to invest in their growth strategies.

Breaking down direct expense growth

When looking at how firms can limit their direct expense growth, one option that should be considered is to adopt the same strategy observed among Am Law 100 firms since 2023. While direct expense growth is at 7.9% for the market, the Am Law 100 firms saw a slower growth rate at 6.9% as these firms have limited their headcount growth.

Reducing hiring classes and stricter performance management is one of the easiest ways to slow direct expense growth, but it has opportunity costs. As previously mentioned, legal demand remains strong so law firm leaders will not want to miss out on the chance to increase their market share. Indeed, the Am Law Second Hundred and Midsize firms have seen much greater success by seeking to expand their market share in recent years.

Other options such as reducing compensation packages or cutting benefits are unlikely to be successful solutions for firms because those solutions may see talented individuals leave and dampen firm morale amid an ongoing talent war. With very little wiggle room on the direct expenses to maneuver, one way to slow expense growth will rely on leveraging process improvements, technology, and smarter resourcing — not pay cuts.

Changing overhead expense trends

Over the past three years, the proportion of firms’ overhead expenses has seen shifts as well, indicating a change in priorities. The proportion going to occupancy and office expenses has been trending downwards, while technology and benefits expenses have been on the rise.

Rising technology spend will not surprise firm leaders; it’s widely seen as essential to long-term efficiency and profit margins. In fact, many law firms have shown a willingness to invest, especially in AI driven tools. Certainly, leadership will want to see a return on these investments — and if results are not produced or are not at the levels expected, firms could be tempted to cut their losses and scale down investment into technology, especially in the event of an economic downturn. Given the arms race brewing around these tools, however, such pullback may reduce the long-term competitiveness of the firm.

Occupancy’s share of overhead expenses has decreased by 1.9 percentage points in recent years, suggesting that even while firms pushed for a full return to the office, commercial real estate costs have not kept up with revenue growth. With long‑term office leases up for renewal and negotiation, leaders may again embrace a shift toward broader hybrid work to further increase those savings.

Support staff compensation has remained at almost one-third of all overhead expenses, maintaining essentially the same proportion of overhead expenses over the last three years. That does not tell us the full story, however, as support staff covers several different functions for law firms and the growth and the changes in those areas tell us about what business functions firms are prioritizing.

The Thomson Reuters Institute’s Staffing Ratio Survey indicates that the growth of full-time equivalent (FTE) support staff per lawyer mirrors broader overhead trends — one which emphasizes technology, business development, and management roles. Firms are focusing on improving internal business processes to better support lawyers, with the aim of enhancing efficiency and quality across their operations. At the same time, functions that are declining are in more manual-task roles such as word processing and research, signaling that technology investments have been delivering tangible results to the bottom line. This shift is particularly significant because word processing staff constitute the largest share of support staff at 28%, down from 36% in 2016.

What is next for the legal market?

Despite — and partly because of — a turbulent economy, the US legal market remains resilient, posting another quarter of continued demand growth and robust worked rate increases. Yet the memory of rapid expense inflation is fresh for law firm leaders, and with ongoing trade tensions and geopolitical uncertainty, the threat is real.

As firms choose expense strategies, they must balance supporting short-term opportunities with long‑term sustainability. Actions such as cutting headcount can lift near‑term margins but risks leaving firms under‑resourced when growth returns, given the time required to ramp up headcount. Data suggests that firms are willing to invest in process and productivity improvements, which may increase near‑term pain to secure longer‑term gains.

In the second half of 2025, leadership decisions made amid volatility will be pivotal. Firms that pair disciplined cost control with smart, forward-looking investment will be best positioned not only to weather the pending storm but to accelerate when conditions improve.

You can get a fully copy of theÌý¶¶Òõ³ÉÄê® Institute’s Law Firm Financial IndexÌýfor the second quarter of 2025 here

Key takeaways:

• • • Higher polarization is seen — Stable growth levels contracted across all segments, forcing them toward polarized outcomes and eliminating the comfortable stability seen in 2024.

    • Not all firms were equal — While some law firm segments experienced a downward migration toward underperformance, others demonstrated an exceptional upward trajectory.

    • A buffer may be in place — Those firms seeing declining performance tended to concentrate on modest negative levels rather than experiencing severe downturns, suggesting that current market conditions are creating a buffer against sharper declines.

While the ¶¶Òõ³ÉÄê® Institute’s Law Firm Financial Index rose in the second quarter of 2025 amid increase legal demand, the overall metrics suggested stability, with clients turning to their outside law firms for guidance. Indeed, the quarter looked unnaturally smooth.

Yet this surface-level tranquility masks a far more dynamic reality. We can examine how individual firms performed by calculating demand growth for each firm and grouping them into six buckets:

• • • severe decline (more than 10% decrease)
    • moderate decline (between 5% and 10% decrease)
    • modest decline (between 0% and 5% decrease)
    • modest increase (0% to 5% increase)
    • solid increase (5% to 10% increase)
    • exceptional growth (more than 10% increase).

When examining all law firm segments, the data distribution provides compelling evidence for a clear movement. The moderate increase range, which served as the stable foundation for law firm performance, experienced significant erosion as nearly one-quarter of firms were pushed out of this comfortable middle tier. The most notable trend shows industry dynamics driving firms toward two distinct outcomes: exceptional growth at the high end and modest decline clustered just below break-even.

Geography plays a key role in how firms are performing. More firms in the Northeast, Southeast, and Southwest regions are seeing strong growth, while firms in the Midwest and West are showing signs of slower performance and diminishing middle-ground results. Meanwhile, firms with international exposure faced volatility, especially among lower-growth ranges. Interestingly, this volatility seems to create a natural limit to how much performance can drop, helping some firms avoid more severe declines and show a measured response to outside pressures.

However, these overall trends hide important differences between law firm segments. Each group saw unique shifts, showing how similar conditions led to very different results depending on the firm’s size and market position.Ìý

Am Law Second Hundred: Polarization at the extremes

The Am Law Second Hundred responded differently to today’s market pressures. Instead of moving in a single direction like other law firm segments, firms in this group were pulled toward both strong growth and weaker results. The middle range, which was once more stable, has narrowed, and its share has been redistributed across the full spectrum of outcomes.

Many firms that were growing exceptionally fast are now settling into more stable performance levels, suggesting that earlier peaks may not have been sustainable. Rather than abrupt changes, the general trend is moving towards a more stable pattern, albeit with a concerning rise in the number of firms encountering significant declines.

Midsize firms: The upward trajectory

While the Am Law Second Hundred showed a more balanced spread of results, Midsize firms moved sharply upward. Market conditions pushed many of these firms into top performance, with the number of high achievers more than doubling. At the same time, fewer firms struggled with serious challenges. What stands out most is that many firms jumped straight from steady growth to exceptional results, skipping the usual gradual progress.

Current industry dynamics have helped many Midsize firms move from moderate to stronger growth. This change wasn’t the result of a new strategy, but rather the outcome of earlier investments in talent that now fit well with today’s environment. Further, Midsize firms more limited international exposure, stronger focus on litigation, and lower rates may be contributing to this standout performance that has set them apart from the next group of firms.

Am Law 100: The downward drift

The demand growth data for Am Law 100 firms shows a clear shift in how performance is spread. The biggest change happened in the moderate growth category, in which nearly half the firms were pushed out of what used to be a stable zone. This shift shows that more firms are ending up with weaker results, while only a few are seeing strong gains. The number of firms with declining performance has increased quickly, and those doing exceptionally well are too few to balance out the overall drop.

The way performance is spreading across Am Law 100 firms shows that steady, moderate growth is becoming harder to maintain. Factors like international exposure, slower hiring, and changes in client needs seem to be pushing firms toward either strong results or weaker demand, with fewer staying in the middle. These conditions are making competition within this group more intense.

The legal market’s current reality

In the second quarter of 2025, the legal market continued to evolve, with different types of firms reacting in their own ways to changing conditions. While the LFFI rose and pointed to general stability, beneath that surface, many law firms are being affected by new pressures: stronger competition, a differing client mix, and overexposure to certain markets — all of which are creating a wider gap between top performers and those firms on the lower rungs.

Focusing clients at the center of business decisions is becoming more important for long-term growth; and each segment-specific pattern demonstrates how firms are finding different pathways to achieve this goal. For example, Midsize firms are doing well, likely because their flexible operations fit the current environment; and the Am Law Second Hundred is holding steady, showing that a mix of business models can help those firms adjust to outside pressures. Meanwhile, the difficulties facing Am Law 100 firms seem to come more from structural shifts and adverse operating conditions than from strategic missteps.

The evolving dynamics within the legal industry suggest increased fluidity. Whereas law firm financial performance in recent years has been influenced primarily by broad macroeconomic trends, current conditions are shaped by volatile policies and geopolitical developments, resulting in diverse business conditions across clients, regions, and industries. These shifts present both heightened risks and new opportunities, making it essential for leaders of law firms of all sizes to assess their positioning in preparation for potential challenges ahead.

You can get a fully copy of the ¶¶Òõ³ÉÄê® Institute’s Law Firm Financial Index for the second quarter of 2025 here

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¶¶Òõ³ÉÄê® Institute Law Firm Financial Index Report

Key takeaways in Q2

• • • The Law Firm Financial Index (LFFI) score increased by 4 points compared to Q1 2025, reflecting a surprisingly stable quarter with growing legal demand.
    • Midsize law firms and Second Hundred firms experienced stronger revenue growth, outperforming Am Law 100 firms.
    • Overhead and talent-related expenses continue to rise, especially in areas like technology and knowledge management.

A stable quarter, but one with mixed signals

As said, Q2 2025 stood out for its unexpected stability. Despite the uncertain geopolitical and economic environment, law firms experienced a notable rise in demand for legal services, a development that was potentially driven by clients seeking expert guidance amid growing international tensions and regulatory uncertainty.

However, this apparent calm may be misleading. Counter-cyclical practices — such as litigation, bankruptcy and labor & employment — have gained prominence. Litigation leads the race as the fastest-growing area, while tax and labor also are showing signs of an upswing.

The second quarter also saw an acceleration in a longstanding trend within the competitive landscape. Midsize and Am Law Second Hundred firms continued to be the primary sources that are driving overall growth, leading in revenue growth and outperforming the traditionally dominant Am Law 100. Meanwhile, Am Law 100 firms faced slowdowns in several practice areas and reduced headcount growth, highlighting the challenges of scale amid an uncertain environment.

In an additional challenge, operating and talent costs continued to rise steadily. In Q2, firms invested heavily in strategic areas such as technology and knowledge management systems. These investments are no longer seen as optional — they are now considered essential for firms to maintain competitiveness and deliver value to increasingly demanding clients.

Can the legal sector hold steady amid uncertainty?

At first glance, financial indicators suggest a robust foundation in which law firms operate nowadays; however, within the legal sector, there is a growing sense that this stability may be short-lived. While it is tempting to think that the current moment will persist until year’s end and bring a return to normalcy, it appears as if the legal industry is now sitting in the calm eye of a hurricane, with darker skies on the horizon.

Adding to the complexity is the growing risk of a potential recession. While the current environment still allows for growth as lawyers facilitate all aspects of an economy in transition, the possibility of economic slowdown means that firms should prepare for or reassess their already existing recession plans. The lessons from previous downturns thus remain relevant: Revenues can decline rapidly when external conditions shift, while expenses tend to remain fixed and begin to exert added pressure on profits.

Simultaneously, clients seem to become more selective and cost-conscious, scrutinizing with which law firms or legal service providers new and existing work should land. This combination of rising costs and shifting client expectations demands that law firms enact a more strategic, flexible, and data-driven approach to maintain profitability in a rapidly evolving landscape. In this context, firms are encouraged to adopt a more cautious and preventive strategy — one that’s focused on long-term sustainability and risk mitigation.

You can download

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