Key insights:

• • • UK law firms face a more selective growth market in 2026Ěý— Client demand remains steady, but external legal spend expectations have cooled, with growth concentrated in areas such as Regulatory, Labor & Employment, and international work.

    • Legal expertise alone is no longer enough — UK legal buyers increasingly favor law firms that combine technical excellence with commercial judgment, business understanding, and practical guidance aligned to client priorities.

    • AI adoption is becoming a client expectationĚý— Corporate legal teams are moving faster than their outside law firms on GenAI, and many UK legal buyers now expect outside counsel to use AI to improve efficiency, workflows, and the quality of legal work.

The legal market in the United Kingdom today has shifted into a new normal. While law firms saw an explosion of demand and spending immediately following the pandemic, increasing client caution has resulted in a shift in priorities. Today’s law firms cannot simply rely on their old ways of providing legal service to succeed, as UK clients expect firms to combine expertise, commercial judgment, international reach, and visible AI-enabled improvements in how legal work is delivered.

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2026 State of the UK Legal Market

A new report from the Thomson Reuters Institute, “2026 State of the UK Legal Market,” reveals how the UK legal market is shifting, as more judicious clients are beginning to force law firms to reassess their strategy. Overall anticipated net spend from legal clients has seen declining growth rates in recent years, and while some practices like Regulatory and Labor & Employment continue to see strong demand growth, other practice areas such as Insurance, IP, and Disputes face potential contraction.

This shift is also guided by emerging buyer preferences. The report reveals an increasing commerciality to the UK legal market, one in which clients increasingly favor advisors that combine legal excellence with commercial judgement, and those that are leveraging AI to bolster not only efficiency but improve the overall legal work product.

Taken as a whole, the report paints a picture of clients that now are moving faster than their outside legal advisors, strengthening their internal capabilities, and setting clearer (and higher) expectations. This means that UK law firms cannot rest on their laurels, as clients increasingly push their outside firms to keep up with new business challenges.

The market is cautious, but opportunity remains

The report reveals that UK legal buyers are more cautious about external legal spend than they have been at any point in the last five years. That may mean law firms can no longer rely on the broad-based demand that defined the post-pandemic period and instead need to be more precise about where opportunity exists — and where it doesn’t.

The report tracks buyer sentiment through net spend anticipation (NSA), which measures the share of buyers expecting to increase external legal spend over the next 12 months minus those expecting to decrease it. Since its 2021 peak, UK NSA has fallen steadily to +5 percentage points in 2025, returning the market to the more stable, single-digit baseline that was seen before the pandemic.

For those law firms looking to capture increased business, the report makes clear that legal expertise is now the price of entry, not the point of differentiation. The firms that stand out will be those that know how to apply their expertise in ways that reflect the client’s business realities.

Indeed, that is becoming even more important as corporate legal departments face growing pressure to demonstrate their own value to the wider organization, and they’re increasingly pointing to improvements in their own quality and effectiveness even before mentioning cost savings, efficiency, or time savings. Not surprisingly, more than one-third of UK legal buyers now cite business savviness as a reason they favor a particular law firm.

To help demonstrate their internal value, clients are pushing their outside law firms to leverage advanced technology to improve the overall effectiveness of legal work. Of course, this has resulted in a clear gap, the report notes, between how corporate legal teams are moving and how law firms are responding. For instance, the report shows that more than half of UK corporate legal respondents say their organizations are already using GenAI tools across the business, compared with just about one-third law firm respondents who said this.

That difference in outlook matters because clients increasingly believe AI will become a larger part of how legal work is delivered, and they’re not content to simply wait and see whether their outside counsel will fully adopt the technology. Indeed, corporate legal departments are expecting their outside law firms to keep pace with how legal work is changing, and they will reward those firms that do.

You can download

a full copy of the Thomson Reuters Institute’s “2026 State of the UK Legal Market” by filling out the form below:

Key findings:

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

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

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

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

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Q1 2026 Law Firm Financial Index

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

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

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

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

The segments’ strategy split

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

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

Rain in the forecast?

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

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

You can download

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

Key takeaways:

• • • New Zealand legal market achieves revenue and profit growth — A new TRI report on the New Zealand law firm market shows firms rebounding strongly from the pandemic, with firm revenue and profits up impressively.

    • Transactional and counter-cyclical practice demand drives success — More than half of the legal demand for New Zealand law firms comes from transactional work, which rose of the past year; meanwhile, counter-cyclical practices saw even higher growth rates.

    • Managed expenses and increased partner utilisation boost profit margins — Despite rising expenses due to technology and knowledge management investments, New Zealand law firms maintained manageable costs and increased equity partner utilisation.

For New Zealand law firms, years of careful investment and strategic pandemic recovery have paid off. Today, strong demand has vaulted firm revenue growth above double digits, leading to profits not seen among New Zealand firms since the early days of the pandemic, according to a new report from the Thomson Reuters Institute (TRI) and data from TRI’s .

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2026 Report on the State of the New Zealand Legal Market

Demand at New Zealand law firms rose more than 5% last year, following stagnant or decreasing growth rates between 2022 and 2024, according to TRI’s 2026 Report on the State of the New Zealand Legal Market. As a result, overall firm revenue rose by more than 10%, placing it back near pre-pandemic levels. Coupled with managed expense growth, New Zealand law firms saw their first double-digit profit growth since 2021, after declines in demand for transactional practice work scuttled profits in 2022 and 2023.

Overall, more than half of the legal demand for New Zealand law firms comes from transactional work such as corporate general and M&A practices; and indeed, demand for such work rose last year after seeing only modest growth or declines in the the years prior. However, the report shows that even more notable is the rise of demand in counter-cyclical practices such as disputes & litigation, insurance defense, and workplace relations. The growth rate of counter-cyclical demand topped that of transactional demand in the second quarter of last year and continued to separate itself throughout the remainder of the year.

At the same time, firms continued to enjoy steady rate growth, with their worked rate growth over this past year coming close to their average rate growth than was seen from 2022 to 2024.

Interestingly, this represents a different strategy by New Zealand firms, compared to those in the United States or Australia, to capture profits through other means while keeping their rate increases manageable. And indeed, while Australian and US firms have largely seen falling utilisation, New Zealand equity partners averaged more hours worked per month in 2025 than they did the year prior, which helped to drive higher revenues.

Meanwhile, total expenses ticked up slightly last year compared with 2024, with both direct expenses and indirect expenses rising. However, much of this growth in indirect expenses is largely due to increased investments in technology and knowledge management, an increasingly necessary expense in the age of AI.

As a result of the demand rebound and more manageable expenses, New Zealand law firms are seeing their revenues and profits soar.

Overall revenue more than doubled, percentagewise, in 2025, which in turn directly led to sky-high profits in 2025 that were almost triple what they were the year prior. Profit per equity partner also saw similar gains.

Overall, New Zealand law firms on average largely held steady with a profit margin around 43%, while some firms saw profit margins soar above 50%.

As the report shows, all of this represents a very positive financial picture for New Zealand law firms. The return of demand, steady rate growth, and managed expenses has provided firms a solid footing from which to grow further. And if New Zealand law firm leaders can build on those positive metrics, they look poised to take these gains and grow further in 2026.

You can download

a full copy of the Thomson Reuters Institute’s “2026 Report on the State of the New Zealand Legal Market” by filling out the form below:

Key takeaways:

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

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

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

After two consecutive quarters of improvements in the ¶¶ŇőłÉÄę® 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 theĚýThomson Reuters Institute’s Q4 2025 Law Firm Financial IndexĚýhere

Key findings:

• • • The market remains strong, but growth is difficult — Australian law firms are still posting solid demand and rate growth in the first half of FY 2026, yet the pace is becoming more challenging to sustain.

    • Australia is no longer a single legal market, but three distinct ones — The report identifies three clearly differentiated law firm segments: Large firms leading demand growth through aggressive investment; Big 8 firms emphasizing pricing power and cost discipline; and Midsize firms pursuing steadier, more moderate growth.

    • Early signals suggest GenAI is reshaping productivity and leverage — Changes in hours worked across seniority levels point to possible early impacts of GenAI; and while overall productivity is stable, non‑equity partners and associates are logging fewer hours, while senior associates and equity partners are working more.

The Australian legal market enters the back half of FY 2026 with strong topline numbers, but beneath the surface, the market is working harder to maintain its momentum. Firms are navigating slower rate growth, shifting demand patterns, and the early tremors of what may prove to be a generative AI-driven transformation.

Solid footing, harder-won gains

Australian law firms built an impressive track record over the post-pandemic era, and the first half of FY 2026 shows that run may not be over yet — although its character is changing. Demand growth of 4.8% year-to-date sits a full percentage point above the average quarterly pace since FY 2022, according to the Thomson Reuters Institute’s just-released 2026 Australia: Midyear Legal Market Update report. Worked rates, meanwhile, rose 4.7%, which is respectable, but a noticeable step down from the 5.4% average growth firms had enjoyed since FY 2022.

At the practice level, the picture is broadly encouraging. Both transactional and counter-cyclical practice groups are accelerating, with workplace relations leading all practices at 9.9% year-to-date growth and corporate general close behind at 7.7%. However, a potential warning sign lies in the divergence among each macro-category’s flagship practice: insolvency & restructuring is surging at 7.9%, while mergers & acquisitions sits in contraction at -2.1%. If dealmaking remains subdued while restructuring activity accelerates, transactional practices could face meaningful headwinds in the quarters ahead.

Three markets, not one

Perhaps the most significant finding in this year’s report is what the market-wide averages have been concealing. Last year’s Australia State of the Legal Market report highlighted growing competition between the Big 8 and a broader group of Large law firms that were challenging the Big 8’s dominance. This year, a refined three-segment framework reveals that the former Large category was actually masking two very different stories, between Large firms and a newly identified set of Midsize firms.

The newly delineated Large firms have emerged as the clear demand leaders, posting nearly 7% year-to-date growth — roughly double their peers — fueled by aggressive investment and expansion. The Big 8, by contrast, are leaning into pricing power and cost discipline, growing demand at a more measured 2.7%. And the Midsize cohort, at 2.4% demand growth, is charting a balanced, moderate course.

The profitability divergence is even more striking. Since FY 2022, the firms now classified as Large have grown profits per lawyer by 27.4%, while Midsize firms managed just 3.1% — much closer to the Big 8’s 7.1% than to their former stablemates. What previously appeared to be a broad-based challenge to the elite was, in reality, concentrated among a smaller group of high performers that were pulling the average upward.

Early signals of AI-driven change

The report also surfaces a potentially significant development in law firm productivity. While overall hours worked per month ticked up slightly for the average qualified fee earner, the gains are unevenly distributed. Non-equity partners recorded their third consecutive productivity decline, and junior and mid-level associates are also slightly down. Yet senior associates and equity partners are logging more hours, keeping overall numbers stable. One possible explanation is GenAI — if firms are deploying these tools most heavily on research, drafting, and document review tasks that traditionally filled junior and mid-level associate hours, this is precisely the pattern we would expect to see. While it’s too early to draw solid conclusions, the distribution of hours may represent an early sign of how AI is beginning to reshape the traditional leverage model.

There is also a note of caution from firms’ clients. ¶¶ŇőłÉÄę Market Insights data shows Australian general counsel growing more conservative in their spending outlook, with net spend anticipation for overall legal work dropping to 0 points. That means just as many GCs see their legal spend increasing as those that anticipating it decreasing.

Interestingly, international legal spend tells a different story — Australia-based GCs are increasingly looking outward, with the Asia-Pacific and Latin American regions emerging as areas of particular activity, while Europe has cooled. For Australian firms with cross-border ambitions, the short-term opportunity may lie to the global east and south rather than west.

Looking into the second half of the year

As the Australian legal market moves into the second half of FY 2026, the story is no longer one of uniform prosperity but rather, one of strategic differentiation. Demand remains healthy, profitability is solid, and expense discipline is improving; however, growth is no longer evenly distributed. The law firms that thrive in the quarters ahead will be those that understand which game they’re playing. In an increasingly segmented market, adaptability — not scale alone — will define success.

You can download a full copy of the Thomson Reuters Institute’s “2026 Australia: Midyear Legal Market Update” report by filling out the form below:

You can read TRI’s first “Inside the Shift” feature, The 4 scenarios: Which law firm business model are you building? here

If you’re running a law firm right now, you’ve probably felt it — the ground is shifting fast. AI isn’t some future consideration; indeed, it’s already shaping how clients choose their firms, how work gets done, and which business models are built to last.

To examine this situation — and many more in the future — more deeply, the Thomson Reuters Institute (TRI) has begun publishing a new feature segment, , that will allow our expert analysis and supporting data to more fully tell some of the most important stories in the legal, tax, accounting, corporate, and government areas.

Our first Inside the Shift feature, The 4 scenarios: Which law firm business model are you building? by Elizabeth Duffy, TRI’s Senior Director of Client Engagement and Raghu Ramanathan, President of ¶¶ŇőłÉÄę Legal Professional business, cuts through much of the noise around AI adoption in the legal industry. The piece lays out a clear, uncomfortable truth: in the age of AI, strategic clarity isn’t optional — it’s survival.

For years, many law firms have tried to hedge their bets. A little bespoke work here, a little efficiency there. Premium pricing mixed with cost pressure. The result? A mushy middle that feels safe but is actually the most dangerous place to be. As the feature makes clear: Law firms without a distinct position — neither elite, automated, scaled, nor protected by regulation — are the ones most exposed to existential risk.

And here’s the kicker that the authors point out: Clients aren’t waiting for firms to catch up.

Corporate legal departments are already evaluating firms based on their AI maturity — how effectively they use technology to deliver speed, consistency, and quality. This is happening even as many clients are still figuring out their own AI strategies. In other words, law firms are being judged by their clients right now, whether they’re ready or not.

Client pressure is building faster than internal capabilities can keep pace.

Even corporate legal departments new to AI are asking pointed questions of outside counsel.

The authors don’t argue that there’s one correct model. Instead, the piece lays out four distinct scenarios that law firm leaders can choose from, making the case that choosing something deliberately is far better than drifting. Of course, each scenario demands different investments in talent, technology, pricing, and client engagement. What they all share, however, is intention.

That’s what makes this piece — and future Inside the Shift features — so valuable. It’s not full of hype, and it’s not fear‑mongering. Rather it’s offering a strategic framework for leaders who know that AI is reshaping professional service markets but are still wrestling with what that actually means for their organization.

If you’re a managing partner, innovation leader, or industry watcher who’s tired of vague predictions and wants a clearer map of what’s ahead, the Inside the Shift features will be well worth your time. The questions they will raise — about positioning, differentiation, and the cost of standing still — aren’t comfortable, but they’re exactly the questions firms need to be asking now.

So don’t just skim the headlines about AI in law. Click through and read today’s Inside the Shift feature. It might help you see, more clearly than before, which business model you’re actually building in your law firm — and whether it’s the one that will be able to carry your firm into the next decade.

You can find more from the Thomson Reuters Institute 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 guardĚý— 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 buildsĚý— Firms fielded strong rates at the beginning of 2025, which helped power profits; however, with client budgets stretched, firms must demonstrate value to justify their higher rates.

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

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Q4 2025 Law Firm Financial Index

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

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

The rate question

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

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

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

Preparing for changing weather ahead

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

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

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

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 ¶¶ŇőłÉÄę® Institute and the Center on Ethics and the Legal Profession at Georgetown Law,Ěýshows 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” inĚý, 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 theĚý2026 Report on the State of the US Legal Market, published jointly by the ¶¶ŇőłÉÄę® 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 ¶¶ŇőłÉÄę® 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 ¶¶ŇőłÉÄę 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 ¶¶ŇőłÉÄę® Institute and the Center on Ethics and the Legal Profession at Georgetown Law, here

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2026 Report on the State of the US Legal Market

As the data underpinning the just-released 2026 Report on the State of the US Legal Market — published jointly by the Thomson Reuters Institute and the Center on Ethics and the Legal Profession at Georgetown Law — makes clear, the industry is experiencing its own tectonic moment. Fundamental forces such as shifting client power, economic instability, and technological disruption are pushing some firms to extraordinary heights while leaving others on increasingly unstable ground.

This year’s report examines how the legal market’s current elevation came to be, why it may not last, and what firms can do now to prepare for the inevitable shift.

Key findings in the report

Some of the key findings discussed in this year’s report include:

• • • Unprecedented demand surge amid market redistribution — The US legal market experienced some of the strongest demand growth in more than a decade, driven in part by regulatory shifts and geoeconomic instability. Critically, smaller firms captured the lion’s share of growth as clients moved demand from the most expensive firms to lower-cost alternatives.
    • Intense expense growth — Technology spending and talent costs are rising rapidly, with firms aggressively investing in AI capabilities while simultaneously expanding headcount. This dual arms race is sustainable only so long as demand and rate growth can be maintained as well.
    • Structural business model conflict — The industry remains trapped between transformative technology and outdated billing structures. Despite heavy AI investments that will fundamentally alter how legal work is performed, 90% of legal dollars still flow through hourly billing arrangements that may no longer reflect the value delivered.
    • Deteriorating buyer sentiment — Many corporate general counsels (GCs) are signaling that they are considering significant spending pullbacks ahead, with Net Spend Anticipation dropping to levels not seen since the pandemic. Financial forecasts increasingly point to contraction by mid-2026.
    • Historical warning patterns — Today’s legal market dynamics (represented by booming demand amid instability, runaway expenses, and universal optimism) closely mirror the conditions that preceded previous industry downturns in 2007 and 2021.

As the report makes clear, the challenges ahead are significant. The same forces creating today’s peaks are simultaneously undermining the ground beneath them. The surge in demand stems not from economic health but from chaos — trade wars, regulatory upheaval, and geopolitical tensions — all while GCs face stagnant budgets and intensifying pressure to demonstrate value.

While much of this is outside firms’ control, however, their response to it is not. The report clearly shows that those firms that use the current boom to reinforce their footing by modernizing pricing models, strengthening client relationships, and deploying technology in ways that deliver measurable value rather than marketing gloss will be best positioned for what comes next.

As this year’s report illustrates, 2025 was less a summit than an inflection point. The firms that treat elevation as permanence may find, as countless mountain ranges have over geologic time, that height is not a promise — it’s a phase.

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