Law
firms
dramatically
accelerated
their
technology
investments
in
2025,
with
spending
on
tech
and
knowledge
management
tools
growing
9.7%
and
10.5%
respectively
—
the
fastest
real
growth
likely
ever
experienced
in
the
legal
industry,
according
to
the
newly
released
2026
Report
on
the
State
of
the
US
Legal
Market
from
Thomson
Reuters
and
Georgetown
Law’s
Center
on
Ethics
and
the
Legal
Profession.
The
surge
in
technology
spending
comes
as
firms
race
to
deploy
generative
AI
capabilities
while
simultaneously
managing
record
demand
growth
that
saw
billable
hours
increase
2.5%
for
the
year,
hitting
as
high
as
4.4%
growth
in
July.
However,
the
report
warns
that
“tectonic
forces”
in
the
legal
industry
are
creating
fundamental
tensions
between
transformative
technology
investments
and
outdated
billing
structures.
“The
tech
revolution
this
time
around
isn’t
the
gentle
cycle
that
law
firms
experienced
when
online
research
replaced
sprawling
legal
libraries
or
when
email
supplanted
fax
machines,”
the
report
says.
“Such
changes
streamlined
workflows
but
left
the
fundamental
practice
of
law
untouched.
“Now,
the
use
of
advanced
AI-driven
technology
like
generative
AI
represents
something
different:
A
technology
that
can
draft
briefs,
analyze
contracts,
and
synthesize
case
law
in
ways
that
can
actually
alter
how
legal
work
gets
done. For
an
industry
that’s
operated
essentially
the
same
way
since
Langdell
introduced
the
case
method
in
the
1870s,
this
is
uncharted
territory.”
The
technology
spending
increase
represents
a
seven
percentage
point
jump
above
core
inflation,
making
it
the
most
significant
investment
acceleration
since
at
least
the
global
financial
crisis
of
2007,
the
report
suggest.
Combined
with
talent
costs
rising
8.2%,
firms
are
making
unprecedented
bets
that
AI-enhanced
capabilities
will
justify
premium
pricing
and
drive
competitive
advantage.
The
strategy
appears
to
be
paying
dividends
for
firms
with
intentional
AI
deployment
plans,
the
report
says,
noting
that
law
firms
with
a
formal
AI
strategy
are
3.9
times
more
likely
to
experience
critical
benefits
compared
to
those
without
significant
plans
for
AI
adoption.
The
Billing
Model
Crisis
Despite
these
significant
technology
investments,
the
report
identifies
a
fundamental
disconnect:
90%
of
legal
dollars
still
flow
through
standard
hourly
rate
arrangements,
according
to
data
drawn
from
Thomson
Reuters
Legal
Tracker.
This
creates
what
the
report
calls
“an
almost
absurd
tension”
where
firms
deploy
technology
that
can
accomplish
work
in
minutes
that
once
took
hours,
then
try
to
bill
for
it
by
the
hour.
“The
math
doesn’t
work
unless
firms
can
negotiate
rate
increases
steep
enough
to
offset
the
efficiency
gains,”
the
report
states.
“However,
clients
aren’t
eager
to
see
all
their
productivity
benefits
flow
straight
to
law
firm
profits.
Nor
are
they
prepared
for
the
sticker
shock
of
a
$2,000
hourly
bill
from
an
associate,
even
if
what
they’ve
accomplished
in
that
time
may
have
taken
10
hours
to
complete
previously.”
Both
law
firms
and
their
clients
are
locked
in
a
standoff
over
pricing
innovation,
the
report
suggest.
Corporate
legal
departments
want
their
outside
firms
to
propose
billing
solutions
that
incorporate
AI’s
efficiencies,
while
firms
complain
that
procurement
teams
still
evaluate
everything
by
converting
it
back
to
hourly
rates.
“Why
spend
months
developing
a
sophisticated
value-based
pricing
model
when
the
procurement
team
will
just
divide
the
total
by
estimated
hours
and
compare
it
to
last
year’s
rates?”
the
report
asks.
Making
matters
worse,
most
clients
do
not
even
know
whether
or
how
their
outside
firms
are
using
gen
AI
—
a
disconnect
that
suggests
neither
side
is
having
honest
conversations
necessary
to
break
the
impasse.
The
Value
Squeeze
The
technology
spending
surge
is
occurring
against
a
backdrop
of
intensifying
client
pressure,
the
report
indicates.
It
documents
that
corporate
legal
departments
have
led
law
firms
in
gen
AI
adoption
ever
since
its
introduction
in
2022,
giving
in-house
teams
firsthand
experience
with
AI-driven
efficiency
gains.
When
GCs
see
their
own
departments
using
AI
to
handle
routine
work
at
a
fraction
of
traditional
costs,
they
increasingly
question
why
outside
firms
charging
premium
hourly
rates
are
not
delivering
similar
efficiencies.
This
dynamic
is
creating
what
Thomson
Reuters
Market
Insights
research
calls
a
“client
value
squeeze.”
Nearly
90%
of
GCs
report
that
resource
limitations
are
preventing
them
from
delivering
the
level
of
strategic
impact
their
organizations
expect,
forcing
intense
scrutiny
over
external
counsel
spending.
The
pressure
is
reflected
in
declining
net
spend
anticipation
(NSA)
among
corporate
buyers,
which
has
dropped
to
levels
not
seen
since
the
pandemic
struck
in
2020.
While
41%
of
buyers
at
companies
with
more
than
$1
billion
in
annual
revenue
planned
to
increase
legal
spending
in
Q3
2025,
22%
planned
to
decrease
it
—
resulting
in
a
net
anticipation
of
just
19%,
down
from
23%
the
previous
quarter.
The
Mobile
Demand
Phenomenon
One
consequence
of
these
technology
and
pricing
dynamics
is
accelerating
“mobile
demand”
—
the
movement
of
legal
work
from
the
most
expensive
Am
Law
100
firms
to
less
costly
alternatives.
Midsized
firms
captured
nearly
5%
demand
growth
in
the
latter
half
of
2025,
while
the
Am
Law
100
struggled
to
crack
2%,
creating
the
largest
gap
between
segments
since
the
Global
Financial
Crisis.
“With
the
average
Am
Law
100
lawyer’s
standard
rates
cracking
the
$1,000
barrier
in
2025
—
while
everyone
else
averaged
around
$600
—
the
math
became
irrefutable,”
the
report
says.
General
counsel
needed
to
do
far
more
legal
work
with
the
same
budgets,
and
shifting
matters
to
firms
charging
40%
less
provided
necessary
breathing
room.
This
trend
has
implications
for
technology
strategy.
The
report
notes
that
firms
outside
the
Am
Law
100
grew
their
fees
worked
at
a
pace
equal
to
or
faster
than
larger
competitors
despite
significant
rate
disadvantages,
suggesting
traditional
hierarchies
may
be
fundamentally
shifting.
Technology
investments
that
enable
smaller
firms
to
deliver
sophisticated
work
previously
reserved
for
elite
practices
could
accelerate
this
redistribution.
Tech
As
A
Talent
Multiplier
Rather
than
using
AI
to
reduce
headcount,
as
other
industries
have
done,
law
firms
are
taking
the
opposite
approach.
The
report
finds
that
if
AI
augmentation
makes
lawyers
more
efficient
and
valuable,
firms
believe
this
only
increases
manpower’s
worth.
Lawyer
full-time
equivalent
(FTE)
growth
remained
strong
at
2.9%
in
2025,
marking
the
third
consecutive
year
of
historically
robust
hiring.
“Whereas
other
industries
may
be
touting
AI-induced
layoffs
to
promote
efficiency,
the
legal
industry
has
chosen
the
opposite
course,”
the
report
says,
noting
that,
since
January
2023,
the
average
midsized
and
Am
Law
second-hundred
firm
has
grown
headcount
by
more
than
8%.
This
strategy
is
particularly
notable
for
associates,
whose
realization
rates
average
just
85.6%
and
whose
work
is
already
being
written
off
at
significant
rates.
“This
creates
a
buffer
in
which
AI
can
absorb
the
inefficient
portions
without
touching
collected
revenue,”
the
report
explains.
“Firms
can
automate
the
work
that
wasn’t
getting
paid
for
while
keeping
associates
busy
on
higher-value
tasks.”
Warning
Signs
Ahead
Although
the
average
firm
saw
13%
profit
growth
in
2025,
the
report
identifies
multiple
warning
signs
for
2026.
Forecasts
from
Thomson
Reuters
Financial
Insights
point
toward
steep
demand
declines,
with
the
middle
of
2026
potentially
slipping
into
contraction.
The
forecast
shows
quarterly
year-over-year
demand
growth
dropping
from
2.4%
in
Q4
2025
to
potentially
-0.7%
by
Q3
2026.
Historical
patterns
also
raise
concerns.
The
report
notes
that
the
legal
industry
has
a
“peculiar
historical
habit
of
surging
just
before
it
stumbles,”
with
similar
demand
explosions
preceding
both
the
2008
financial
crisis
and
the
2022
inflation
crunch.
In
both
cases,
firms
that
mistook
temporary
peaks
for
permanent
shifts
found
themselves
with
bloated
cost
structures
when
conditions
reversed.
“Law
firms
have
seen
this
movie
before,
and
they
should
remember
how
it
ends,”
the
report
warns.
The
2008
crisis
did
not
just
crater
demand,
it
fundamentally
rewired
the
power
dynamic
between
firms
and
clients,
with
corporate
legal
departments
absorbing
Big
Law
talent
and
transforming
into
sophisticated
operations
that
scrutinized
every
billing
line
item.
The
Tech
Investment
Imperative
The
report
argues
that
now,
during
the
current
boom,
is
precisely
when
firms
should
be
making
strategic
technology
investments
rather
than
waiting
for
the
next
crisis.
However,
those
investments
must
go
beyond
simply
acquiring
AI
tools
to
fundamentally
rethinking
operating
models.
“The
question
isn’t
whether
traditional
operating
models
can
survive
but
whether
law
firms
are
committed
to
truly
transform,”
said
Raghu
Ramanathan,
president
of
Legal
Professionals
at
Thomson
Reuters,
in
a
statement
issued
by
Thomson
Reuters
along
with
the
report.
The
report
identifies
three
critical
transformational
shifts
required:
-
Modernizing
pricing
models
that
no
longer
match
how
legal
work
is
done. -
Strengthening
client
trust
in
an
environment
where
legal
buyers
are
increasingly
selective. -
Deploying
technology
in
ways
that
deliver
measurable
value
rather
than
marketing
gloss.
ALSP
Integration
and
Service
Innovation
The
report
says
that
forward-thinking
firms
are
beginning
to
assemble
more
creative
solutions
by
packaging
various
pricing
structures,
automated
services,
and
partnerships
with
alternative
legal
service
providers
(ALSPs)
into
comprehensive
offerings.
ALSP
usage
has
risen
steadily
over
the
past
decade,
and
leading
firms
are
incorporating
these
providers
as
force
multipliers,
the
report
says.
That
said,
North
American
firms
lag
behind
international
competitors
in
this
regard.
Just
27%
of
lawyers
from
North
American
firms
reported
that
their
firm
has
a
non-traditional
legal
services
division
or
partners
with
independent
ALSPs,
compared
to
76%
of
lawyers
across
the
UK,
Europe,
and
Australia.
The
Value
Communication
Gap
One
of
the
most
striking
findings
of
the
report
is
that
there
is
a
gap
between
firm
confidence
in
their
technology
investments
and
their
ability
to
articulate
value
to
clients.
Rather
than
citing
AI
efficiency
as
justification
for
rate
increases
—
which
averaged
7.3%
growth
in
2025,
the
fastest
pace
since
at
least
the
global
financial
crisis
—
firm
leaders
express
concern
about
needing
to
prove
they’re
still
worth
current
rates
in
an
AI
world.
“Their
focus
is
defensive,
not
offensive,
making
them
appear
paralyzed
by
fears
of
value
erosion
rather
than
confident
explanations
of
value
enhancement,”
the
report
says.
Client
value
extends
well
beyond
faster
turnarounds
or
more
work
per
hour,
the
report
suggests.
Legal
departments
need
outside
firms
that
alleviate
current
constraints
—
whether
that
is
through
practical
tools
clients
can
reuse,
seamless
team
integration
or
clear
links
between
legal
advice
and
business
objectives.
“For
AI
efficiency
to
justify
premium
pricing,
firms
must
first
understand
what
value
means
to
each
specific
client
and
then
demonstrate
how
the
firm’s
AI
deployment
serves
those
particular
needs,”
the
report
asserts.
Living
on
a
Volcano
While
previous
demand
surges
were
tied
to
economic
bubbles,
the
report
says,
today’s
growth
is
driven
by
instability
itself
—
trade
wars,
regulatory
chaos,
and
geopolitical
tensions
that
could
sustain
legal
demand
even
through
economic
downturns.
“Viewed
through
this
lens,
the
groundswell
firms
are
riding
suggests
that
the
ground
beneath
them
is
becoming
fundamentally
unstable
—
less
a
mountain
than
a
volcano:
a
risky
evolution
but
still
capable
of
sustaining
them
through
a
long
winter,”
the
report
says.
“Yet
living
on
a
volcano
carries
its
own
perils,
and
firms
may
ultimately
miss
the
relative
predictability
of
the
occasional
tremor.”
The
firms
that
successfully
navigate
this
environment
will
be
those
that
use
the
current
boom
to
fundamentally
reimagine
their
operating
models
—
not
just
to
throw
money
at
technology
and
talent,
but
to
align
their
business
structures
with
the
future
their
clients
are
already
demanding.
“The
law
firms
that
will
define
the
next
era
of
legal
services
will
be
determined
not
by
how
much
they
invest
in
technology
and
talent,
but
by
how
boldly
they
reimagine
their
entire
operating
model,”
Ramanathan
said.
“The
winners
won’t
necessarily
be
determined
by
size
or
legacy,
but
they’ll
be
the
firms
that
act
decisively
now
to
align
with
the
future
their
clients
are
already
demanding.”