Robert Ambrogi Blog
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forces” in the legal industry are creating fundamental tensions between transformative technology investments and outdated billing structures.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.”