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 ¶¶ÒőłÉÄêÂź 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 theÌęThomson Reuters Institute’s Q4 2025 Law Firm Financial IndexÌęhere

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 ¶¶ÒőłÉÄêÂź 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 guardÌę— 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 buildsÌę— 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:

• • • Pricing power now depends on clear, measurable value — Firms must prove their worth at every client touchpoint to justify charging premium rates.

    • Value delivery spans five critical stages — Demand management, service design, delivery excellence, value capture, and relationship management. All must be systematically audited and improved.

    • Action is essential — Diagnosing gaps is only the first step; law firms must assign accountability, set goals, and continuously adapt to meet evolving client expectations and avoid competing solely on price.

The 2026 Report on the State of the US Legal Market, published jointly by the ¶¶ÒőłÉÄêÂź Institute and the Center on Ethics and the Legal Profession at Georgetown Law,Ìęshows that over the past three years, legal industry pricing has skyrocketed at an unprecedented pace.

Many law firms have enjoyed strong demand and the ability to command higher rates, often without significant pushbacks from clients. However, that era of unchecked growth is coming to an end. Today’s clients are far more discerning about what they are willing to pay for and why. More often, they scrutinize every invoice, questioning whether the value delivered truly matches the premium price charged.

The danger for many law firms is complacency. Past success can create a false sense of security, leading to assumptions that reputation alone will sustain pricing power. However, as client procurement teams become more sophisticated and alternative legal services providers enter the market, firms that fail to prove their worth will find themselves competing on cost, which can result in a race to the bottom that few can afford.

This shift signals a fundamental change in the market in which pricing power is no longer guaranteed by reputation or past performance. Instead, pricing power hinges on a firm’s ability to demonstrate clear, measurable value at every stage of the client relationship. Those firms that fail to adapt risk being forced into price-based competition, eroding margins and undermining long-term sustainability.

By 2025, even as inflation eased to a more typical — but still elevated — 3%, many law firms continued to push rate increases at more than twice that level. The disconnect between pricing and underlying economic conditions had widened into a significant gulf, underscoring the critical need for firms to clearly demonstrate and defend the value behind their premium rates.

So, how can firms ensure they are delivering premium value to earn the right to charge premium rates? The answer lies in systematically diagnosing where value is created — and where it is destroyed — across the entire client experience journey.

The 5 stages of legal service delivery

To maintain pricing power, firms must examine their service delivery through five key client experience stages. Each stage represents an opportunity to create value or destroy it.

1. Demand management

Do you truly understand the client’s business problem, or are you focused solely on the legal question? Effective demand management requires moving beyond transactional requests to uncover a client’s strategic objectives. This ensures the solutions proposed align with business impact, not just technical compliance.

You can hear more about the “2026 Report on the State of the US Legal Market” inÌę, on YouTube

Start every engagement by asking: What client business goal is driving this need?, What constraints is the client operating under?, and How will success be measured beyond legal compliance? These questions can reframe the conversation from a focus on deliverables to a focus on strategic results, positioning your law firm as a proactive partner in the client’s success.

By facilitating co-design workshops with clients and requiring clear documentation of business goals for each project, your firm ensures that every initiative is aligned with measurable impact. This approach not only demonstrates leadership and a deep understanding of client needs, but it also builds lasting trust and drives greater value throughout the relationship.

2. Service design

Are your offerings built around client outcomes or your own internal structure? Many firms design services based on practice groups and billing models, not on what may serve clients best. This can create friction and inefficiency.

Adopting a client-centric design philosophy requires mapping the client journey, identifying pain points, and designing integrated services around client business needs. For instance, bundling advisory and compliance work into outcome-oriented solutions and coordinating delivery through a single relationship manager simplifies decision-making, strengthens trust, and delivers consistent, measurable value throughout the engagement.

3. Delivery excellence

Do you have safeguards that prevent failures before they ever reach the client? Even the most sophisticated legal advice loses its impact if delivery is inconsistent or error prone. Breakdowns in market research, service design, process conformance, or communication don’t just create inefficiencies, they erode client trust and diminish the firm’s perceived value. This is about embedding reliability into your delivery model, so clients don’t have to chase updates, catch errors, or manage deadlines on your behalf.

Invest in quality checks and project management tools and use proactive risk controls —such as early warning systems for potential delays — that provide automatic status updates and clear ownership. These measures signal professionalism and reliability, reinforcing your premium positioning.

4. Value capture

Can clients clearly see and articulate the value you’ve delivered? If your impact is invisible, your pricing will always feel inflated. Many firms struggle to articulate outcomes beyond hours billed, which can leave clients to wonder what they are paying for.

Communicate value in terms that matter to clients. Use outcome-based reporting to show how your work mitigated risk, accelerated timelines, or unlocked opportunities. Record these in quarterly impact reports — because when clients see tangible benefits, they are far more willing to pay premium rates.

5. Relationship management

Do you build trust systematically or hope it happens organically? Trust is the foundation of pricing power, but it doesn’t happen by accident. Firms that rely on personal rapport alone risk inconsistency and vulnerability when key contacts change.

Implement structured feedback loops, client listening programs, and regular value reviews. These mechanisms demonstrate commitment to continuous improvement and deepen client confidence in your firm’s ability to deliver.

Turning insights into action

Assessing your client’s journey is only the first step. The real challenge and opportunity lies in acting on those insights. Start by identifying gaps in the five key stages, then prioritize improvements that will have the greatest impact on client perception and outcomes.

Assign accountability for each stage, set measurable goals, and track progress over time. Consider creating cross-functional teams to break down silos and foster collaboration. Remember, value delivery is not a one-time project; it’s an ongoing discipline that requires vigilance and adaptability.

As the legal market transforms, so do client expectations. Firms that cling to outdated assumptions about pricing power will inevitably find themselves competing on cost alone — a losing strategy in an increasingly crowded and sophisticated marketplace.

You can download a full copy of theÌę2026 Report on the State of the US Legal Market, published jointly by the ¶¶ÒőłÉÄêÂź Institute and the Center on Ethics and the Legal Profession at Georgetown Law, here

Key takeaways:

• • • Industry-wide AI investment brings risk — Law firms are navigating the effects of a broader, industry-wide surge in AI investment that has sparked speculation about a potential AI bubble, which suggests firms may need to reconsider aspects of their current strategic approach.

    • Strategic AI adoption leads to better returns — Firms that implement AI thoughtfully and strategically see greater, tangible returns, while those adopting AI superficially or mainly to justify higher billing rates could be more exposed if the bubble were to burst.

    • Long-term stability requires clear client value — Long-term stability hinges on making sure AI investments provide clear, measurable value and improved efficiency to clients, with transparency and client outcomes remaining central as law firms adapt to this period of heightened AI enthusiasm and uncertainty.

The newly released 2026 Report on the State of the US Legal Market, published jointly by the ¶¶ÒőłÉÄêÂź Institute and the Center on Ethics and the Legal Profession at Georgetown Law, shows law firms enjoying strong demand and record profits throughout the past year.

Indeed, for the average firm, this feels like a golden moment — clients are spending, rates are climbing, and AI investments promise a competitive edge. However, the report also illustrated how much of this growth is built on unstable ground. As firms race to adopt AI and advanced technology, they face new risks if they fail to use these tools wisely or don’t deliver clear value to clients. Success for many law firms now depends on rethinking business models, focusing on client needs, and ensuring technology investments create lasting stability.

This ramped-up competition has pressed law firms towards unprecedented growth in their spending on technology and knowledge management, with firms increasing their investments by nearly 11% and 10% in 2025, respectively — far outpacing inflation and 2024’s levels. This surge is driven by an arms race to adopt advanced AI solutions, particularly generative AI (GenAI), which promises to fundamentally transform how legal work is performed. Yet, the real winners may not be those firms that spend the most, but rather those that deploy AI strategically.

And, as past ¶¶ÒőłÉÄê research showed, law firms with a clear AI strategy are to see tangible returns on investment. To understand why this optimism could be risky, let’s look at what’s fueling the AI frenzy.

AI hype in the legal sector

The legal industry in recent years has seen an explosion of interest and investment in AI. Industry enthusiasm , which has attracted an estimated $1.6 trillion in global investment since 2013, with $375 billion forecast for 2025 alone — a scale that’s surpassed historic projects like the Apollo space program. This enthusiasm stems from the belief that AI can significantly improve efficiency, as GenAI can draft documents, analyze contracts, synthesize summaries of complex topics, and even support legal decision-making.

Amid this surge in adoption and funding, concerns are mounting that the legal industry could be swept up in an AI bubble. If this bubble pops, investor sentiment sours, or funding gets curtailed, the average law firm could face a sharp slowdown in demand for premium services as client budgets tighten. Those firms heavily invested in AI without clear plan for return on investment (ROI) would be exposed to higher costs, lower utilization, and strong pressure to cut rates. These risks are amplified when AI is adopted superficially, such as using it merely to justify higher billing without improving outcomes.

Indeed, the issue becomes even more concerning when considering the magnitude of recent investments. From 2021 to 2025, law firms dramatically ramped up their technology investments, increasing their tech spending by an impressive 39.3% over those four years. This surge in spending is measured against firms’ technology spending levels in 2021 — the year before GenAI became widely available. Knowledge management investments, closely tied to AI capabilities, followed a similar trajectory, with investment growth in that area surging 37.2% over the same period. These aren’t modest upgrades; rather, it’s a clear indication that firms are pouring resources into AI at an unprecedented rate.

If a sharp correction in the broader economy — like the AI bubble bursting — would occur, it would greatly strain client budgets, forcing organizations to cut costs and scrutinize their outside legal spending. As budgets tighten, clients will seek better value at lower price points, intensifying competition among firms and pushing outside lawyers to justify every dollar of their rates. Those firms that rely on premium pricing without delivering measurable efficiency gains will be the most exposed.

In fact, these vulnerabilities become clearer when we look at the numbers. Profit per lawyer rose by 8.4% above pre-2022 levels by the end of 2025, and fees worked per lawyer climbed an even greater 16.8%. However, most of that growth came from rate hikes, not necessarily operational improvements.

You can hear more about the “2026 Report on the State of the US Legal Market” in , on YouTube

Some analysts argue that record-high rates could signal efficiency gains — if lawyers accomplish in one hour what previously took them 10, then the value delivered may justify the price. However, a $2,000-per-hour associate rate during a downturn could create sticker shock that could push clients toward lower-cost firms or in-house solutions. This dynamic underscores the risk of relying on pricing power instead of demonstrable value creation. In other words, today’s profitability hides a structural weakness: If client budgets tighten, those law firms leaning on rate increases rather than operational improvements will be the first to feel the pain.

Therefore, preparing for this scenario requires more than maintaining profitability. The real test of AI investment is whether it delivers measurable improvements for clients. Premium billing tied to AI adoption is sustainable only when clients clearly see added value. Firms that invest heavily in AI without translating those investments into efficiency and outcomes risk losing ground. The priority now for law firms should be to align their technology with client needs, demonstrate tangible benefits, and maintain transparency to preserve trust in an increasingly competitive market.

Assessing the payoff: AI value vs. AI bubble

By the end of 2025, law firms were allocating almost 40% more to their technology budgets than before the rise of GenAI. The ideal scenario for AI adoption would involve a brief, manageable dip in productivity as professionals adapt, followed by lasting efficiency gains. The reality, however, is more complex. Fees worked per lawyer have surged, even outpacing profit growth, driven largely by rate increases. Although higher rates can reflect efficiency gains when work is completed faster and with greater precision, they also create vulnerability if clients perceive them as a pure pricing move. Firms that fail to translate AI-derived gains into clear, measurable value may risk feeling strong pressure as client push back.

That brings us to a simple math equation that was underscored in the State of the US Legal Market Report: Will the practical returns — such as ROI — genuinely outpace the massive sums being funneled into AI investment?

This is ultimately a question of balancing costs and benefits, of course; but if the AI bubble bursts and prices soar, fast action will be required. And it will be those firms who guided their use of AI to generate greater value and thus higher profits that will come out ahead. In other words, if the value delivered by AI exceeds its cost, law firms are well positioned to weather even dramatic market shifts, making their AI strategies sound regardless of broader industry volatility.

You can download a full copy of the 2026 Report on the State of the US Legal Market, published jointly by the ¶¶ÒőłÉÄêÂź Institute and the Center on Ethics and the Legal Profession at Georgetown Law, here

Register below.

Notes from previous attendees

“From the quality of the content to the caliber of colleagues in legal marketing and business development, this is one of the standout events I look forward to every year.” — Ian Ribald, Chief Business Development & Marketing Officer, Willkie Farr & Gallagher LLP

“2024 was my first time at the CMBDO Forum—and as we wrapped up, I knew it wouldn’t be my last. Connecting with peers, sharing real stories, and learning from their experiences was invaluable.” — Oliviana Mingarelli, Head of Marketing and Business Development, Fasken Martineau DuMoulin LLP

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 ¶¶ÒőłÉÄêÂź 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 insights:

• • • Value perception gap persists — Most corporate legal departments still measure and report primarily on cost, obscuring their broader strategic contributions.

    • Value alignment toolkit — A new value framework exists for legal departments to close the gap in the perception of their value to the organization.

• • • AI accelerates urgency — The rise of AI makes comprehensive value measurement essential in order to safeguard legal department budgets and resources.

As many General Counsel continue to elevate their position as strategic leaders in their business, they are often constrained by cost-focused narratives. Despite their success in delivering high-quality legal advice, managing complex risks, and enabling business growth, many corporate legal departments remain trapped in a narrow perception defined almost entirely by spend metrics.

The disconnect is clear. While legal departments support strategic goals across multiple dimensions — delivering effective advice, operating efficiently, protecting the organization, and enabling business strategy — most measure and report only on cost and time. And when leadership sees only budget and time metrics, this unfortunately reinforces the cost center narrative and hides the real value of the legal department.

The perception gap: What gets measured gets seen and valued

Research from the Thomson Reuters Institute (TRI) reveals a troubling pattern: While 90% of legal departments now use formal metrics — up from 75% eight years ago — very few align those metrics to the full range of their strategic goals. Indeed, nearly half of all metrics currently in use relate to spend factors, while only about one-in-four measure quality, and even fewer capture how legal departments protect enterprise value or enable business strategy.

This creates what TRI calls a perception gap. When C-Suite executives describe in what areas they expect their legal departments to focus, they consistently over-emphasize efficiency while under-recognizing contributions such as business protection and strategic enablement. As a result, many legal departments struggle to secure resources for risk management initiatives, their strategic contributions go unnoticed and unrecognized, and their efficiency efforts are viewed as mere cost-cutting rather than value optimization.

The root cause of this misalignment lies in measurement itself. A legal department cannot manage what doesn’t get measured, and more importantly, it cannot demonstrate value for what remains invisible.

The 4 spinning plates: A complete picture of legal value

Through extensive analysis of strategic priorities across hundreds of legal departments, TRI identified four core areas of responsibility that remain evergreen regardless of changing business environments, regulatory shifts, or technological disruption.

The four spinning plates model captures these perpetual responsibilities — effective, efficient, enable, and protect — in a deliberate metaphor. Like a performer keeping multiple plates spinning simultaneously, GCs must maintain constant attention across all four areas. They are fundamentally interconnected — efficiency gains can enable strategic work, while strong risk management builds the trust necessary for bolder business strategies.

Yet when metrics are focused primarily on cost and time, they tell only a fraction of this story. Many legal departments have built their measurement framework around the Efficiency plate alone, leaving the other three plates far less visible to enterprise leadership and limiting their understanding of legal’s comprehensive roles and strategic influence.

Closing the gap: the value alignment toolkit

TRI has spent years conducting research, developing frameworks, and facilitating strategic planning sessions with legal department leaders on this challenge. Now, it is making this expertise broadly accessible through a comprehensive new resource: the Value Alignment Strategic Toolkit.

This free online resource center provides practical, immediately actionable guidance to better define, measure, and communicate a corporate legal department’s full value to the organization. The toolkit is built on benchmark data from hundreds of legal departments along with proven strategic frameworks and expert insights that all is organized into six interconnected sections that guide users from foundational clarity to strategic execution. These six sections include:

1. 1. 1. Define your department’s strategic goals — Establish business-connected objectives with clear ambitions
      2. Design metrics that matter — Select measurements that demonstrate value creation, not just cost
      3. Strengthen your data — Build robust collection and analysis methods, including feedback involving the voice of the stakeholder
      4. Tell your value story — Develop compelling narratives that resonate with enterprise leadership
      5. Review, refine & advance — Implement continuous improvement processes
      6. Maximize your impact — Scale success across all four spinning plates of value

Each section includes practical resources, including assessment tools, templates, checklists, framework guides, and real-world examples. The metrics masterclass features more than 50 legal department metrics aligned to the four-plate framework, including 12 recommended core metrics that span all four strategic areas.

For example, a GC preparing for a quarterly check-in with the CFO could use the appropriate templates, guides, best practices, and the recommended metrics to create a one-page dashboard. The dashboard would provide customized metrics to align with their CFO’s priorities, such as deals accelerated, risks avoided, or initiatives supported.

The AI imperative: Why better metrics matter more than ever

Not surprisingly, the emergence of generative AI (GenAI) adds new urgency to this work, presenting both opportunity and vulnerability. On one hand, AI holds significant potential to enhance legal department capabilities by automating routine tasks, accelerating research, improving contract analysis, and freeing lawyers to focus on higher-value strategic work. At the same time, however, if legal departments continue to be viewed primarily through an efficiency lens, advances in AI that reduce time and cost could conceivably threaten department resources and headcount.

Comprehensive value measurement can help legal departments demonstrate enterprise value that cannot be replaced by AI. When legal departments can clearly articulate how they protect enterprise value, enable faster time-to-market for new products, strengthen board confidence through proactive governance, and maintain high stakeholder satisfaction scores, they establish their strategic necessity regardless of technological advancement.

The Value Alignment Toolkit provides frameworks and tools to build this comprehensive measurement approach, ensuring legal departments are positioned to leverage AI’s benefits, while at the same time demonstrating the irreplaceable value that the legal department provides, including:

• • • Quantifying strategic legal department contributions that AI cannot replicate, such as judgment, relationship-building, business counsel, risk navigation, and more
    • Demonstrating value beyond efficiency to justify budgets and resources
    • Identifying high-impact opportunities in which legal department expertise can best leverage AI to address the most pressing business needs
    • Assessing ROI of specific AI use cases to prioritize where to adopt and scale, and conversely, areas that are not ready yet

Moving from cost center to strategic partner

For a corporate legal department, the transformation from cost center to strategic partner requires more than aspiration, it requires data-driven evidence. It demands a systematic approach to measurement that captures the complete picture of the department’s contributions and then communicates that value in clear business language.

The Value Alignment Strategic Toolkit enables legal departments to shift from reporting simple cost metrics, such as:

We reduced outside counsel spend by 15%

to telling a more complete story:

We delivered value by maintaining 90% stakeholder satisfaction while handling 25% more strategic matters, reducing costs through technology and process improvements, preventing potential regulatory exposure through proactive compliance programs, and accelerating product launch timelines through innovative legal structures.

This is not merely reframing — it’s revealing what was always present but had remained largely invisible. This enables strategic conversations about the department’s complete contribution rather than defaulting to discussions solely around cost.

The path forward

Many corporate legal departments today create enterprise value every day across multiple dimensions by providing sound advice, managing risk exposure, and enabling growth. Yet too often, that value remains unrecognized simply because it isn’t being measured or communicated effectively.

At a moment when business transformation is accelerating, regulatory complexity is increasing, and technology is reshaping legal service delivery, continuing to rely on cost and time metrics alone isn’t just insufficient, it actively undermines a legal department’s strategic position.

The complete value story of legal departments deserves to be told. It’s time to move from defending budgets to demonstrating impact, from reporting costs to revealing value, and from being seen as a necessary expense to being recognized as an essential strategic partner. Better frameworks and tools can shift the conversation from cost center scrutiny to strategic leadership discussions about how GCs and their teams enable business growth.

Transform how your legal department demonstrates value by accessing the free frameworks, metrics, and strategic guidance in the Value Alignment Strategic Toolkit

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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 ¶¶ÒőłÉÄêÂź 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 ¶¶ÒőłÉÄêÂź Institute’s Law Firm Financial Index for Q3 2025 here