Key takeaways in Q3:

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

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

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

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

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Q3 2025 Law Firm Financial Index

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

Firms on shifting ground

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

However, this isn鈥檛 just a story of expansion. The competitive landscape is being redrawn as clients reassess their legal partnerships. Many are prioritizing value and flexibility, shifting work to firms that offer more competitive pricing 鈥� a trend we鈥檝e noticed for the past year or so. This is obviously working to the advantage of those firms seeing significant demand growth as a result, but the more expensive law firms are also seeing boosted performance, as the trend helps them secure higher rates on the work they do maintain.

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

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

Emerging fault lines of legal strategy

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

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

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

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a full copy of the 成人VR视频 Institute’s “Q3 2025 Law Firm Financial Index” by filling out the form below:

Indeed, the average law firm billing rates have grown by 107% since 2006, while demand for law firm services 鈥� as clocked by total billable hours worked by the average law firm 鈥� has not followed suit, increasing just 5% during the same timeframe.

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Developing a Framework for Law Firm Differentiation and Growth: Introducing the Apex Strategy Model

Clearly, this dynamic is not sustainable, creating an approaching financial pinch point that law firms will have to navigate.

In a new white paper from 成人VR视频’ Jen Dezso, Developing a Framework for Law Firm Differentiation and Growth: Introducing the Apex Strategy Model, the author looks at a new methodology that can help law firms with this navigation by allowing them to achieve the differentiation and sustainable growth they need in a competitive market. 鈥�

The case for a different strategic focus 鈥�

Despite the legal industry being one of the oldest professional service sectors, the paths to success for its participants are varied. There is no one law firm, or even type of firm, that has emerged as a dominant market leader with all the answers on how to most successfully operate within the business of law. In fact, data from the 成人VR视频 Institute shows that over the past decade less than 40% of top law firms have grown their top-of-mind awareness in the market 鈥� how clients call to mind a certain firm for legal matters 鈥� a metric we refer to as market mindshare. During this time, the average law firm actually experienced an erosion in top-of-mind awareness among clients.

This leaves the legal industry at an inflection point with no dominant market leader.

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Further, recent interviews with managing partners also reveal that several market dynamics are driving a significant shift in their strategic thinking which is being driven by diminishing returns from rate increases, growing client sophistication, and technological disruption. What makes the situation even more ripe for significant change is that while previous years were characterized by cautious optimism about market conditions, today’s law firm leaders have shifted more heavily toward caution, expressing heightened concern about their competitive positioning.

Enter the Apex framework

As law firms increasingly find that both their clients and the market have matured, the previous business model that allowed them to be nimble and explore different growth opportunities has become difficult to manage at scale. With many law firm managing partners becoming more focused on profit and return on investment rather than on simply increasing revenue, many firm leaders are quickly realizing that being all things to all clients isn鈥檛 as profitable as having a targeted focus that could potentially drive a true leadership position within the market.

It is here where the Apex Strategy can help by providing a structured approach to differentiation by identifying a firm鈥檚 primary strategic focus while maintaining its balance across all essential business elements. This can work to reinforce the strengths of the firm鈥檚 talent and investments rather than spreading those resources too thin across multiple strategic initiatives.

As the white paper illustrates, the Apex Focus Square helps law firm leaders identify a primary strategic focus among geography, expertise, industry, and client type by allowing them to select one corner as the primary differentiator that ultimately guides all other strategic decisions. 鈥婤y creating this effective differentiation, law firms can appeal not only to prospective clients and matters, but also to prospective lateral attorneys.

Going forward with the Apex Strategy

For most firms, this path forward requires making difficult choices about where to focus limited resources. The Apex Strategy provides a framework for making these decisions coherently and 鈥� most importantly 鈥� strategically rather than pursuing disconnected opportunities that lead to over-diversification.

Today, as the legal industry continues to evolve, those law firms that can create strategic differentiation will be able to wield a key driver of sustainable growth. Indeed, the Apex Strategy framework gives law firm leaders a practical tool to establish meaningful market differentiation, subsequently enabling more focused decisions about where to invest their firms鈥� time, talent, and resources.

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a full copy of the 成人VR视频 Institute “Developing a Framework for Law Firm Differentiation and Growth: Introducing the Apex Strategy Model” by filling out the form below:

Yet it is an inescapable reality that GCs, generally speaking, must rely to a large degree on outside law firms to meet all the needs of their organizations, which carries a significant cost. In fact, the cost of outside law firms is not only high, but continues to rise, and quickly. According to TRI鈥檚 recent Q1 2025 Law Firm Financial Index, law firm worked rates grew by 7.3% in the first quarter of 2025, the fastest pace of growth for this figure in nearly 20 years.

We should pause for a quick note: this growth in billing rates is not occurring without input from GCs as clients. Indeed, we are talking about growth in worked rates, also known as agreed-upon rates, or the rates clients agree to pay to engage new matters.

So how can clients that are so concerned about cutting costs agree to such large billing rate increases?

Moving work to save money

We should begin with an observation that agreeing to pay a certain price for something is not the same as agreeing to buy a certain number of units of that thing at that price. Put another way, simply because GCs are agreeing to pay increased rates for law firm billable hours does not imply any guarantee as to how many hours GCs will actually hire their traditional law firms at those rates.

We have observed a years-long trend of demand for law firm services shifting away from the top-tier, most expensive law firms, while demand for hours from Midsize and Am Law Second Hundred law firms has continued to grow. Indeed, we have dubbed this pattern demand mobility. In addition to shift work to lower-cost law firms, other GCs are looking to reduce their spend on outside counsel as a whole by bringing more of their legal work in-house.

In fact, among all corporate GCs interviewed for the State of the Corporate Law Department Report, 42% said they anticipate increasing the percentage of their overall legal spend that they dedicate to their internal team.

As the chart also demonstrates, 22% of GCs said they predict a decrease in their spending with outside counsel. Interestingly, however, a plurality of GCs also anticipate increasing their spend with alternative legal service providers (ALSPs), including those affiliated with law firms. This may indicate that it is not necessarily the idea of working with law firms against which clients are potentially pushing back, but rather, clients may be looking toward the more predictable cost structures typically associated with ALSPs.

A push toward ALSPs?

In fact, the report also provides some indications that GCs are looking more favorably toward ALSPs. According to the above chart, roughly 15% of GCs overall said they intend to increase their spending with ALSPs; but among GCs who are current users of ALSPs (whether independent or affiliated with a law firm), that number is closer to 25%. This suggests that GCs that are already clients of ALSPs appreciate the services they are receiving and intend to use these providers even more.

It is likely no coincidence then that those GCs using ALSPs were also more likely to be looking to reduce their use of outside law firms. In fact, 33% of GCs that are currently using an ALSP, even one affiliated with a law firm, said they were looking to decrease their spend on outside law firms 鈥� an 11-percentage-point increase over the overall population of GCs surveyed.

This provides a fairly strong indication that there is something about ALSPs that GCs find favorable. Indeed, TRI鈥檚 2025 Alternative Legal Service Providers Report provides plenty of evidence for myriad reasons why GCs like ALSPs. In the context of costs, however, a likely favorability driver is the predictability of ALSPs鈥� cost structures.

ALSPs tend to work off of fixed fees or other pricing models that provide alternatives to the traditional billable hour much more frequently than do law firms. GCs likely view this as an advantage. In fact, it鈥檚 a practice GCs are encouraging their outside law firms to pursue more aggressively. Fully 61% of GCs say shifting toward value-based billing or alternative fee arrangements is a medium-to-high priority 鈥� and they are placing the onus for that shift on their outside law firms.

Implications for cost structures in 2025 and beyond

Law firm standard hourly billing rates for 2025 are already locked in place and unlikely to change. However, there will undoubtedly be room for GCs to use increased leverage in agreed-rate negotiations or to push for increased use of value-based billing practices going forward. Indeed, many GCs already are making their desire for more predictable billing models well known, appearing ready to push work toward those law firms that can provide alternatives to traditional billable hour arrangements or even to ALSPs that can provide more predictable billing structures.

Regardless of what mix of strategies GCs pursue in their search for cost savings, the top-down nature of the push coming from corporate C-Suite officers is clear, and GCs will be feeling the pressure to deliver results.

You can download a full copy of the recently released 2025 State of the Corporate Law Department Report from the 成人VR视频 Institute here

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Midsize law firms at the start of 2025

Midsize law firms have experienced a prolonged period of growth, particularly in terms of demand for legal services. Year-end results from 2024 show that midsize firms are near the forefront of demand growth among all segments of law firms tracked by the 成人VR视频 Institute, a showing of strength in law firm key performance indicators (KPIs).

Another positive KPI is the continued growth of law firm productivity, which has continued to grow despite a 2.7% increase in headcount for the average midsize law firm over 2024. This is a notable achievement, given the nearly 15-year trend of declining productivity in the overall legal market.

Balancing rate growth and cost advantage

Midsize law firms are in the somewhat precarious position of needing to balance increasing their hourly rates to optimize revenue potential while simultaneously maintaining a cost advantage over larger peers. While midsize firms have been more aggressive in growing their rates compared to historical standards, it is notable that they have not pushed as hard as their competitors. While the more cautious approach has allowed them to maintain a cost advantage, it also means they might be missing opportunities for even stronger rate growth. As the report suggests, midsize firms should become more comfortable advocating for their higher billing rates. In fact, many midsize law firms have even gone so far as to implement tiered-rate structures to capture more value from new clients or new work from existing clients.

Further, the report shows that midsize law firms face challenges related to rising expenses. These increased expenditures, coupled with slower-than-market-average growth in rates, have somewhat offset the benefits of strong demand growth for many midsize law firms and placed a bit of a damper on their overall profitability. The average midsize firm has seen an increase in overhead expenses, with technology and knowledge management being key cost drivers. While these investments are crucial for long-term success, they have cut into profit growth. However, as the report emphasizes, these kinds of investments are also critical for firms that want to avoid falling behind larger firms that are leveraging advanced AI-driven tools to enhance their service offerings.

Indeed, innovation is a recurring theme in the report. Larger law firms have dedicated teams driving innovation in both internal processes and client-facing functions. Midsize firms, on the other hand, need to explore emerging technologies and find ways to incorporate them into their operations. Relying on outdated ways of working could put midsize firms at a disadvantage, especially as larger firms use technology to create more appealing and affordable service offerings.

Clearly, AI and technology are transforming the legal market, and midsize firms must keep pace with these changes. Corporate general counsel are increasingly looking to be early adopters of AI, and law firms that fail to recognize this shift can risk losing client favorability. Midsize firms should start by targeting low-hanging fruit and gradually adopting advanced AI tools to streamline workflows and enhance service delivery.

Conclusion: No time for complacency

Despite their recent successes, midsize law firms cannot afford to rest on their laurels. While they have enjoyed a period of demand strength and heightened productivity, the legal market is evolving rapidly. Larger competitors are moving aggressively towards an AI-driven future, and midsize firms must follow suit to remain competitive. Investing in technology, understanding client needs, and adopting innovative service models will be key to sustaining growth and profitability.

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a full copy of the 成人VR视频 Institute “Midsize law firms at the start of 2025” by filling out the form below:

While GenAI can automate many tasks, it doesn’t necessarily mean reducing headcount. This is especially relevant for Midsize law firms, many of which already face leverage challenges. GenAI can allow such firms to reallocate their human resources to higher-value tasks like complex problem-solving, client relationships, and strategic work that AI cannot replicate.

With GenAI handling routine tasks more efficiently, firms often find they have increased capacity without increasing staff, leading to growth in revenue without a proportional increase in costs.

Will GenAI mean fewer staff?

Many Midsize firms are justifiably wary of further reducing staff. Some firms already face significant challenges attracting and retaining top talent in a competitive legal market, making the prospect of downsizing even less appealing. For them, GenAI represents a powerful tool to enhance both performance and job satisfaction by alleviating tedious tasks. The ability to focus on the more stimulating and rewarding aspects of their work, in turn, makes the firm more attractive to ambitious legal professionals. Indeed, the top two areas in which legal professionals wanted AI to influence were improved work-life balance and more time spent on engaging judgment-based or expertise-driven work, according to 成人VR视频 Future of Professionals Report.

Moreover, human oversight remains essential. While GenAI can draft documents and conduct research, legal professionals are still needed to review, refine, and ensure the quality of AI-generated work. As , an experienced litigation practice leader at McGivney, Kluger, Clark & Intoccia, aptly puts it: “Our legal professionals use AI tools to enhance our work product and save time and money for our clients, but we always verify the facts and law.”

Many clients now expect firms to use AI to improve efficiency. And law firms have discovered that meeting this demand doesn’t necessarily mean reducing staff but rather enhancing current staff鈥檚 capabilities. In fact, corporate general counsel have expressed a desire to evolve their departments into value centers and become strategic leaders, according to the by the 成人VR视频 Institute. This desire for efficiency and strategic operation isn’t limited to in-house legal teams, the report shows, it also extends to GCs鈥� expectations of their law firm partners as well. Clients increasingly want to see the same commitment to leveraging technology for efficiency and cost-effectiveness that they seek on their in-house team reflected in the actions of their outside counsel.

Enhancing existing capabilities

Leveraging GenAI effectively starts with integrating the technology into current workflows 鈥� training teams to use AI-powered tools for tasks like document review, due diligence, and contract analysis, or to speed up case preparation. McGivney Kluger鈥檚 Raymond, a self-described optimist when it comes to AI in law, says that if law firm leaders 鈥済et this right, this is a growth opportunity,鈥� adding that clients are becoming increasingly aware of the potential of AI. “As sure as death and taxes, they will not pay for manual review of 5,000 pages of medical records” the same as they did before this technology was available, he notes.

Enhancing the team’s capabilities with GenAI also better positions those Midsize firms that are looking to capture a larger market share and deliver superior service by targeting clients that might have historically been out of reach due to concerns about scale. This ability to punch above your weight is a key advantage for Midsize firms aiming to secure higher-value and more prestigious work that had been traditionally dominated by larger competitors.

Special Report Perceptions, usage, and impact of GenAI on the future of work   View full report

For example, Raymond describes his firm鈥檚 integration of vetted, secure, and closed-system AI tools which ensure data privacy and accuracy into its workflows, which allowed the firm to demonstrate to client its commitment to providing both exceptional results and cost-effectiveness.

This efficiency gain is evident across various practice areas. For example, in litigation, tasks like deposition review and summarization or complex medical records review, which previously demanded hours of lawyer time, can now be achieved up to 80% faster with GenAI, allowing for significant cost savings and freeing lawyers to focus on strategic case development, which translates into more billable hours that are less likely to fall victim to a write-down. Further, transactional attorneys and paralegals experience similar benefits. Instead of painstaking manual contract reviews, these tools can quickly analyze contracts for specific clauses, identify potential risks, and even compare documents against precedent or regulatory requirements 鈥� all completed in minutes, leading to quicker turnaround times for clients and more efficient use of billable hours.

Other ways GenAI can help Midsize law firms

There are a few additional considerations for Midsize law firms that are looking to position themselves for an AI future, including:

Developing new service offerings 鈥� GenAI opens doors to innovative services that were previously impractical or impossible. For example, some firms are offering AI-powered legal health check-ups for businesses, rapid regulatory compliance reviews, or predictive legal risk assessments. Firms might also develop automated contract management and alerting systems. These new services can create additional revenue streams without significantly increasing costs, positioning the firm as an innovative leader in the legal market.

Investing in human skills 鈥� Midsize law firm leaders shouldn鈥檛 lose sight of the uniquely human elements of their legal practice. Instead, they should invest in developing critical thinking and strategic planning skills among their team. By focusing on enhancing emotional intelligence and client relationship management abilities and nurturing the capacity to provide nuanced legal judgments and make ethical decisions in the context of AI use, leaders can better prepare their teams for an AI-driven landscape.

Aligning with client expectations 鈥� By proactively adopting GenAI, firms are not just cutting costs, they鈥檙e meeting and exceeding client expectations. According to the 成人VR视频 Institute鈥檚 2024 Generative AI in Professional Services听谤别辫辞谤迟, a significant portion of various corporate departments expressed that their external partners should be utilizing GenAI. Specifically, 58% of corporate legal departments and 56% of corporate tax departments held this view. Additionally, 44% of court systems and 40% of government legal departments also indicated that the outside firms they collaborate with ought to be implementing GenAI in their practices.

Communicating value 鈥� Transparency is key when implementing GenAI. Firm leaders need to clearly communicate to clients how GenAI is being used to improve service delivery and reduce costs. Educate them on AI adoption processes and its benefits and be open about addressing any concerns regarding data security and ethical AI use. This openness builds trust and positions the firm as an innovative leader in the legal industry. Raymond characterizes this as an opportunity to define the client firm relationship and establish guidelines together on billing and workflow efficiency optimization.

Offering continuous learning and optimization

The 成人VR视频 says that to deliver unparalleled client outcomes, law firms must proactively harness the transformative potential of GenAI for enhanced efficiency and cost-effectiveness. As such, firms should regularly assess and update AI tools and processes and stay informed about legal and ethical considerations of AI use in law. Leaders should encourage innovation and experimentation among staff; and to ensure GenAI integration is empowering a profit center, they should establish clear metrics for AI implementation. They should also regularly review and analyze the impact of AI on their firms鈥� profitability, gathering feedback from both staff and clients to continually refine firms鈥� approaches. And remember, be prepared to pivot your strategy based on results and emerging technologies.

Conclusion

The future of law isn’t about replacing humans with AI 鈥� it’s about creating a synergy between skilled legal professionals and cutting-edge technology. By strategically implementing GenAI, Midsize law firms can transform themselves into highly efficient, profitable teams that are ready to meet the challenges of tomorrow’s legal landscape.

Remember, the goal isn’t just cost-saving 鈥� it’s about positioning the firm for success in an increasingly AI-enhanced world while ensuring employee development and satisfaction. With the right approach, GenAI can help better serve clients, open new areas of service, and drive profitability in ways that, before now, weren鈥檛 always possible. As the legal industry navigates this transformative period, it’s clear that the firms that embrace this change proactively and with optimism will be better positioned to win.

You can find more about the challenges facing Midsize law firms here

This surge, excluding the exceptional second quarter of 2021 when growth was being compared against pandemic-induced lows, marks the fastest pace of growth in fees worked since we鈥檝e been compiling this data. Essentially, this makes Q2 2024 the fastest growing organic fees worked total since the Global Financial Crisis of 2007-鈥�08.

Indeed, this uptick in fees worked substantially contributed to an 8.8% growth in profits per equity partner (PPEP) on a rolling 12-month basis, placing firms in an enviable position through the first half of this year.

Diversification safeguards against volatility

One of the most striking aspects of this past quarter’s performance is the diversification of fees worked growth across various practice areas. The chart below shows the impact on overall fees by each practice grouping, with weighted growth shown by the proportion that each practice group comprises of total fees. Unlike the previous revenue boom of 2021-鈥�22, in which growth was predominantly driven by transactional work, the current landscape showcases a more balanced growth pattern.

The average firm in Q2 2024 witnessed nearly equal growth in fees across transactional, counter-cyclical, and other practice areas such as regulatory, trusts & estates, and environmental law. Specifically, transactional work contributed 3.2 percentage points of the total 9.2% growth, counter-cyclical practices added 2.8 points, and other areas accounted for 2.7 points. This diversification places law firms in a position today in which they can potentially thrive irrespective of typical economic cycles.

As seen on the right side of the chart, firms in the Am Law 51-100 and Am Law Second Hundred segments are prime examples of how fees worked growth in Q2 has come from a diversified practice mix, enhancing firms鈥� resilience to market fluctuations. Should there be a decline in either transactional demand or counter-cyclical work, as has happened in the past, many firms will be well positioned to sustain their performance due to their balanced portfolio of revenue streams.

That said, of course, there are notable exceptions within specific segments of firms. Midsize firms, for example, are experiencing the majority of their demand and fees worked growth from counter-cyclical practices, particularly litigation. This heavy reliance on a single practice area could pose risks if demand shifts. Additionally, firms within the Am Law 50 are exhibiting another focused strategy, relying heavily on transactional practices which made up 45% (4.1 percentage points of their overall 9.2% growth) of their total fees growth in the second quarter.

While this more leveraged strategy may yield multiplied success during favorable market conditions, it also poses significant risks during downturns. If anything happens to transactional fees, the Am Law 50 firms are going to lose their key source of growth and could see their PPEP growth lose its positive trajectory. Similarly, those Midsize law firms heavily reliant on counter-cyclical practices like litigation could face substantial challenges if demand in these areas wanes.

Enjoying a more stable position

Overall, however, the average law firm is currently in a more stable financial position from a revenue and expense perspective as well, when compared to the same 2021 short-lived period of prosperity in 2021-鈥�22. Through the second quarter of this year, firms have managed to control their expenses more effectively than during the previous revenue surge, and by doing so, they have thus far avoided carrying the potential burden of rapidly escalating costs should the pace of top-line revenue slow.

It appears that firms have learned from past experiences, particularly since the transactional boom, and have adopted more prudent expense management practices both in aggregate and on a per-lawyer basis. While firms are only increasing their PPEP by 8.8% compared to the 11.5% figures seen during the transactional boom, firms are not having to pay nearly as much for that growth either. Total expenses are increasing by 5.0% and per lawyer costs are increasing by 2.9%; while these figures can be improved on, they are far lower than what was seen during the transactional boom when both aggregate and per lawyer expenses were growing at nearly double digits.

Should revenue begin to slide, firms will not be left paying the exorbitant bill they were left with last time.

In conclusion, the second quarter of 2024 has showcased a balanced and strategic approach to both revenue generation and expense management among all strata of law firms. The impressive 9.2% growth in fees worked highlights the sector’s adaptability and multifaceted growth across various practice areas, ensuring that firms can navigate different economic conditions and an uncertain future. This prudent approach is mirrored in the careful control of expenses, which are significantly lower than during the previous boom.

The varying strategies of different firm segments 鈥� such as the Am Law 50’s focus on transactional work and Midsize firms’ reliance on counter-cyclical practices 鈥� underscore the diverse paths to success. However, it may also demonstrate a strategic leaning in on strengths that can suggest some acceptance of greater volatility in performance.

More broadly, the average firm鈥檚 skill in maintaining a balanced approach will be crucial in its ability to capitalize on future opportunities and mitigate potential challenges, thus ensuring continued growth and resilience in an ever-evolving legal market landscape.

You can download a full copy of the 成人VR视频庐 Institute Q2 Law Firm Financial Index report here.

The new 2024 Report on the State of the US Legal Market, published by the Center on Ethics and the Legal Profession at Georgetown Law and the 成人VR视频 Institute, addresses this tumultuous environment and highlights the fundamental shifts in the legal marketplace that have taken place over the past 15 years.

Indeed, the report offers up the example of Pan Am Airways, the one-time airline industry leader which fell into financial and operational dissolution when its management misjudged the travel marketplace and failed to adapt to change. Emphasizing how law firm leaders who fail to respond to marketplace changes and pivot quickly enough to prepare for the future may see their firms destined for the same fate as Pan Am, the new report discusses the dramatic shift from what it dubs the Transactional Decade of the 2010s 鈥� a period marked by easy-to-borrow money and strong performance for law firms鈥� transactional practices 鈥� to the more recent period in which the majority of growth in demand for law firm services has relied on counter-cyclical practices like litigation, bankruptcy, and labor & employment, which tend to run counter to general economic conditions.

Law firm leaders who fail to respond to marketplace changes and pivot quickly enough to prepare for the future may see their firms destined for the same fate as Pan Am.

The report also discusses the rapid increase in the pace of law firm rate growth, particularly over the past few years. In 2023, the rates clients agreed to pay law firms for new work matters grew by more than 6%, with every segment of law firms seeing aggressive increases in worked rates on par with the pace seen prior to the GFC. At the same time, however, many law firms have seen their realization 鈥� their ability to collect on those increasing rates 鈥� falter; while simultaneously, clients have become more aggressive about trying to move their work to lower-cost firms as a way to control their own costs.

Other key findings in this year鈥檚 report include:

• • • different segments of law firms have taken drastically different approaches to staffing strategies, with the largest law firms actively cutting back on associate headcount as Midsize law firms have grown associate ranks aggressively;
    • expenses have moderated somewhat compared to 2022, but the general picture for expenses remains unclear due to persistent high growth in overhead expenses and a resurgence in direct expense growth due to new increases in salary and associate hiring trends;
    • sagging productivity and declining realization have combined to put a pinch on law firm profitability growth such that even the high pace of rate growth has been largely unable to remedy the situation; and
    • corporate clients seem to be reverting to prior preferences for specialist knowledge, responsiveness, and global coverage when selecting their outside counsel.

And it鈥檚 no surprise, of course, that the growing potential impact of Gen AI also factors heavily into any vision of what lies in store for the legal industry in 2024 and beyond. As our own research has shown, lawyers appear to be optimistic about the potential that Gen AI offers for the future of the legal profession, but some natural skepticism remains. The report also lays out three potential scenarios that may befall the legal industry as Gen AI evolves more fully, each scenario carrying varying degrees of impact 鈥� and the potential need to change 鈥� around how law firms serve their clients and the ultimate benefit this innovative technology could bring to the legal industry.

You can download a copy of the 鈥�2024 Report on the State of the US Legal Market鈥� by filling out the form below:

This picture of the legal market 鈥� painted by Jim Jones, Senior Fellow with the Center for Ethics and the Legal Profession at the Georgetown University Law Center; and Gretta Rusanow, Head of Advisory Services, Law Firm Group at Citi Global Wealth 鈥� became clearer as the session explored key themes and challenges law firm leaders have had to confront this year and those that are likely to continue or arise.

For example, rate growth has been high across the board, and the disturbing inversion of law firm billing rate growth and the pace of inflation in evidence in 2022 and early-2023 has finally reversed. The continued strength of counter-cyclical practices 鈥� including litigation, labor & employment, and bankruptcy 鈥� has been a key driver of demand growth for many law firms, particularly Midsize firms. And interestingly, both the Am Law 50 and Midsize law firms, despite being at extreme ends of the headcount strategy spectrum, seem to have benefited from market conditions in terms of their overall profitability this year.

Is rate growth driving work away from law firms?

Jones pointed out that corporate general counsel still express a broad desire to bring more work in-house, which, he said, 鈥渇eeds into the question of whether clients are reacting to rate increases not by pushing back, but instead by simply moving work.鈥� Indeed, the report, released in mid-September by the 成人VR视频 Institute, posed a similar question in light of overall demand contraction among large law firms, demand growth for Midsize law firms, and overall effective rate favorability for clients.

Corporate GCs still express a broad desire to bring more work in-house, which feeds into the question of whether clients are reacting to rate increases not by pushing back, but instead by simply moving work.

Rusanow was quick to point out that, in her observation of the market, she鈥檚 never seen a correlation between rates and a loss of demand for law firms, stating 鈥渋f law firms have a strong brand, they can command premium rates.鈥� The pair also discussed that, while the data is far from solid, anecdotal indications are that, despite aggressive rate growth, new rate structures coming from law firms are largely holding with minimal loss in realization.

Differing pictures in headcount trends for large firms

Data from 成人VR视频 indicates that Am Law 50 law firms have been aggressively contracting associate headcount, to the point that today鈥檚 associate ranks are nearly equal with those of January 2022, despite two years of hiring cycles. In contrast, data from Citi鈥檚 survey of large law firms shows total Am Law 50 lawyer headcount actually slightly more than 3% higher than a year ago.

In exploring the discrepancy, Jones and Rusanow acknowledged that it was a bit of an indirect comparison, looking at associate headcount compared to all lawyers. There is also a difference in sampling that could account for much of the difference between the numbers.

However, both agreed that certain trends are absolutely influencing headcount among the largest firms. First, lawyer attrition is down considerably as a tight labor market and uncertain economy has led more lawyers to stay put. And while this year鈥檚 incoming associate classes may not be as large as last year鈥檚, they are still strong by historical standards. This is likely attributable to the fact that law firms, when offering employment to incoming associates, must engage in the difficult practice of trying to project associate demand years in advance, a difficult proposition in a volatile market.

Law firms have also reported engaging in more 鈥渄ifficult鈥� performance reviews with associates hired during the 2021 hiring surge, Rusanow noted. Prior to now, law firms have needed the additional capacity, and the lawyers have kept busy. Now that work is slowing, Rusanow explained, and law firms are taking a closer look at lawyer performance.

A look at 2024

The session also offered some suggestions as to what might be on the legal market鈥檚 horizon for 2024 and beyond.

Among the key challenges identified, Rusanow discussed that many law firms are concerned about challenges with attracting, retaining, and developing talent. Law firms also anticipate additional challenges from negotiating the evolving hybrid work landscape, managing the increasing costs associated with inflation, and responding to client pricing pressures.

Still, there are also ample opportunities for law firms. Many law firms, for example, are looking to maximize their opportunities from past expansion into selective practice areas through acquisition of key lateral talent, as well as doing more with their existing clients through cross-selling, Rusanow said. The key geographic area for growth appears to be in the United States, although there is optimism for some growth potential in Europe, more specifically London, as well as in Singapore.

On the pricing front, fully 72% of law firms responding to the Citi survey said they expect an increase in the use of alternative fee arrangements (AFAs) by 2025, a finding echoed in the recent LDO Index report in which 54% of corporate GCs said that AFAs will form a significant part of their future cost-control strategies.

However, at least one large area of concern looms for Midsize law firms that could well put a damper on their 2023 results 鈥� expenses.

We track and report two broad categories of expenses: direct expenses 鈥� those associated with attorney compensation and benefits (other than equity partners); and overhead expenses 鈥� those associated with everything else, from non-lawyer staff, to office rent and office supplies. In some areas of managing their expenses, Midsize law firms are outperforming the market average; in other areas, however, Midsize firms may need to be a bit more concerned.

Industry averages

The average law firm in the industry has experienced high rates of growth in both their direct and overhead expenses since early 2022. For the average firm, direct expense growth peaked at 13.1% in Q1 2022 as calculated on a rolling-12-month average. Overhead expenses for the average firm peaked one quarter later in Q2 2022 at 13.2%.

Across the industry, both metrics have been gradually decreasing from these high-water marks, settling at 6.8% and 7.9%, respectively, at the midpoint of this year.

For direct expenses, much of the prior high level of growth was driven by a combination of two factors: increasing attorney compensation and expanding headcount. Direct expenses have moderated in the past year because, while many law firms have continued hiring, the market has not seen an acceleration in attorney compensation akin to what was seen in much of 2021 and early 2022.

For overhead expenses, recent analysis shows that much of the jump was attributable to those expenditure categories more heavily impacted by the global pandemic and return-to-office volatility, most of which has now tempered out of the market.

Expenses for Midsize law firms

Midsize law firms appear to depart from these industry averages in a few key ways, including:

Direct expenses

The average Midsize law firm continues to experience direct expense growth that is higher than the industry average at 7.9% growth compared to 7.1% for the average firm. This is likely due to the fact that Midsize law firms are still feeling more of the two-factor push driving direct expenses compared to other law firm segments.

For example, the average Midsize law firm saw associate compensation grow by 2.2% in Q2 2023, on top of 7.3% growth in compensation at the same point last year. This means that associates at Midsize law firms have gotten much more costly over the past two years 鈥� along with other titles 鈥� and they continue to do so. While this will settle out over time, the extent to which compensation growth slows may not, by itself, be enough to offset the effects of the other factor driving direct expense growth, that of increasing attorney headcount.

As discussed in a prior installment in this series, Midsize law firms led the market in headcount growth through the midyear point, increasing attorney counts by an average of 5.1%. In contrast, Am Law Second Hundred law firms increased their headcount by a more modest 3.3%, and Am Law 100 law firms increase lawyer numbers by only 2.8% during the same time period.

For Midsize law firms, each of these new attorneys comes at an increased cost. Midsize law firms could be poised to show higher-than-market direct expense growth for some time, particularly as we near another hiring season.

Overhead expenses

The overhead expense picture, on the other hand, shows a bit more favorability to Midsize law firms compared to the market average. While average overhead expenses in the market grew by 7.9% through midyear 2023, the average Midsize law firm saw their overhead expenses grow by only 7.1%. Of course, in this context, only is a relative term; the figure still represents growth well above pre-pandemic averages, but it is better than that of other law firm segments.

The average Midsize law firm saw healthy, but more conservative growth in a number of key expense categories as compared to their larger law firm peers.

Specifically, Midsize law firms saw their expenditures in staff compensation, occupancy, and office expenses grow at a slower pace than their competitor segments, while also posting a more conservative mark for professional staff benefits than their Am Law Second Hundred counterparts.

On the whole, the overhead expense picture appears to be slightly more favorable to the average Midsize law firm.

With only a few exceptions, Midsize law firms have held a solid position of third among the three segments for overhead expense growth as calculated on a per-lawyer-FTE (full-time equivalent) basis. This is due in part to the more controlled growth of expenses in the key areas already discussed, but also to expanding headcount. While Midsize law firms should be commended for keeping expenses well in check, the per-lawyer-FTE comparisons are potentially a bit deceiving because Midsize law firms have been among the market鈥檚 most aggressive in increasing the denominator in that metric through their continuing hiring practices.

The effect on the bottom line

The warning flags waved by Midsize law firms鈥� expenditures, particularly their direct expenses, are not necessarily cause for great concern. However, leaders of these Midsize law firms would be well cautioned to consider how quickly fortunes can change.

Prior to 2022, the Am Law 100 had enjoyed their position as market leaders for demand growth for the prior five years or more. In 2022, that momentum quickly shifted in favor of Midsize law firms. It can just as readily shift back. If, or perhaps when it does, Midsize law firms may find themselves caught flatfooted with increased expenditures on a larger number of more expensive lawyers, but with insufficient demand to keep those lawyers sufficiently productive.

Any such potential drop in productivity would hurt a firm鈥檚 revenue potential, meaning the average Midsize firm would be bringing in less money even as its staffing costs remain high, a recipe for diminishing profitability.

Midsize law firms should be engaging their clients, new and existing, to understand why those clients chose the firm and what will encourage them to stay. At the same time, firm leaders should be looking at creating strategic plans for staffing, factoring in potential retirements and attrition, so that their overall staff remains engaged, productive, and profitable.

This is the fourth part of a series exploring聽the performance of Midsize law firms in 2023.

The segment continues to lead the market for demand growth. Even in the face of large headcount growth figures, productivity declines have been modest compared to the rest of the legal industry. And perhaps most notably, Midsize law firms have gotten much more aggressive this year when it comes to growing their worked rates.

Midsize law firms ended 2022 with worked rates growing by 3.8% 鈥� worked rates being the rates clients agree to pay to engage a new matter. Fast forward just six months and the average Midsize law firm has seen their worked rates grow by 5.1%. That is impressive acceleration from a segment that has historically been pretty conservative in pushing rate increases.

It鈥檚 worth noting that the Midsize law firm segment still resides in third place out of three segments in terms of rate growth, but it is on the heels of the Am Law Second Hundred after trailing by a full percentage point鈥檚 worth of rate growth at the end of last year (3.8% for Midsize firms compared to 4.8% for Am Law Second Hundred firms).

Further, Midsize law firms do not appear to be paying a demand penalty for raising their rates. As discussed earlier in this series, Midsize law firms saw demand for their services grow by an average of 2.8% through the midpoint of the year, well ahead of the other segments 鈥� growth that was largely driven by counter-cyclical practices. The confluence of increasing demand and accelerating rate growth has put Midsize law firms into an enviable position in terms of their potential revenue picture.

An under-discussed but valuable metric included in our key performance indicators is fees worked, which is essentially an analogue for accrual-basis revenue and measures the percentage change from one period to another in the product of hours multiplied by rates. With both demand and worked rate growth solidly in positive territory, Midsize law firms have found themselves with a sizeable advantage in terms of fees worked through midyear.

This would seem to be a positive story on all accounts; however, there is a strong potential for a blot on this otherwise rosy picture.

A potential wrench in the works

Midsize law firms have historically performed very well in terms of capturing their rates, a metric we measure as realization. For purposes of this discussion, let鈥檚 focus on realization as measured two ways: first, billing realization, or the percentage of the agreed rate the client is actually billed; and second, collected realization, or the percentage of the agreed rate the client actually paid.

In terms of realization, Midsize law firms occupy two different positions that would seem undesirable.

On one hand, Midsize law firms are close to the Am Law 100 in terms of the scale of the decline in their realization. The average Am Law 100 law firm has seen their collected realization decline by 1.5 percentage points since Q1 2022. Midsize law firms are close behind, seeing their average collected realization decline by 1.4 percentage points, but in one less quarter, because their decline started in Q2 2022.

On the other hand, Midsize law firms are the only segment tracked that have seen an uninterrupted decline since the slide started. Am Law 100 law firms saw an uptick in collected realization in Q4 2022, while the Second Hundred boosted realization in Q2 2023. For Midsize law firms, once their realization started to slide, there鈥檚 been no stopping it.

The decline of collected realization could hinder what was otherwise shaping up to be a banner revenue year for Midsize law firms. The fees worked metric, by its nature, does not take realization into account. Every drop in collected realization means that more of the work done to boost the fees worked metric will go unappreciated as it will not actually materialize into cash for the law firm.

Seeing a way out

This is not a fait accompli, however. There is plenty of the year remaining for Midsize law firms to make meaningful steps to recover their realization prowess.

Years of research has shown us that, contrary to popular opinion, most realization woes are not related to clients more aggressively pushing back on rates or invoices. Rather, collected realization tends to track in fairly close in parallel to the other realization metric mentioned above, billing realization.

Billing realization is much more a function of internal law firm behaviors than client influence. While clients control how much of an invoice they pay, the departure from the rate a client agreed to pay 鈥� ending with what the client is actually billed 鈥� is largely within the control of the law firm. More specifically, it鈥檚 on the partners who are responsible for billing on matters.

As you can see from the chart, with a few temporary exceptions, billing and collected realization tend to track together. Throughout the doldrums of the pandemic, law firms paid close attention to all aspects of their billing cycle, concerned about their own financial viability. As a result, realization steadily improved across the board from Q2 2020 until essentially Q2 2022. However, since the realization hit its peak, both billing and collected realization have declined.

The good news in this situation is that internal behaviors that drive down billing realization can more easily be influenced than client behaviors. This is evident from the pattern observed during the pandemic. Close attention paid to billing behaviors netted realization gains for the average Midsize law firm 鈥� a pattern of behavior that would be easy enough to restart. This would entail paying close attention to any discounts being offered, and particularly how much work is being proactively written down by attorneys within the firm. 奥别鈥檝别 on potential law firm profits.

Returning discipline to billing practices may not solve all realization woes for Midsize law firms, but any uptick in realization that resulted from additional financial discipline would be a good thing.

At the same time, even as realization slides, Midsize law firms are starting from a much stronger position given their more aggressive rate growth in 2023. For years, larger firms appeared to have subscribed to the belief that some sacrifice in realization was worthwhile if the end result was more aggressive rate growth. Put simply, growing worked rates by an additional 1 to 1.5 percentage points was worth the loss of a few tenths of a percentage point in realization.

If Midsize law firms are beginning to follow the same philosophy, that may well redound to their benefit. They just need to be cautious to closely monitor this process to make sure the math is still working in their favor.

This is the third part of a series exploring the performance of Midsize law firms in 2023.