Feb 10, 2026 | Law Firm Financial Index

Law firms closed 2025 with remarkable success with 14.1% profit growth, profit margins soaring above 40%, and demand that propelled the industry to historic heights. Yet beneath these impressive numbers, a subtle but significant shift is underway, one that makes technology and innovation not just competitive advantages, but essential survival tools for what lies ahead.

According to the Thomson Reuters Institute’s Q4 2025 Law Firm Financial Index, the fourth quarter of last year revealed an inflection point that savvy law firm leaders are already analyzing. While overall demand remained strong at 3.3% growth, the composition of that work changed dramatically. One example is M&A activity, which had been surging, decelerated sharply – dropping 5 percentage points from its third-quarter pace. Meanwhile, bankruptcy and other counter-cyclical work surged, particularly in December, echoing patterns that should feel familiar to anyone who remembers 2008.

The technology imperative

Here’s where the story gets interesting for forward-thinking law firm leaders. While firms celebrated record profits, they also doubled down on technology and knowledge management investments, maintaining double-digit growth in these areas even as they aggressively controlled other overhead expenses. This wasn’t extravagance – it was a strategic necessity.

The reason? Corporate legal departments are already ahead of many law firms in adoption of generative AI (GenAI), according to Thomson Reuters Institute data. General counsels are leveraging AI-augmented strategies to do more with less, and they’re increasingly evaluating which work truly requires premium-priced external counsel and what work can be handled more efficiently in-house or by lower-cost alternatives.

The rate increase reckoning

Further, law firms achieved something remarkable in 2025: an average 7% increase in worked rates, breaking through a two-decade threshold. Since late 2022, every 1% increase in worked rates has been correlated to more than 0.9 percentage points in profit growth – a powerful formula.

However, here’s the challenge: 2026’s rate increases are already in effect and expected to match or exceed 2025’s levels. This comes precisely as clients face tightening budgets and economic uncertainty. The risk isn’t just client pushback on rates and ultimately services, it’s having clients fundamentally rethink their legal spend strategies.

We’ve seen this before. After 2008, firms experienced a stagnant decade as clients moved more work in-house and demanded more value for their dollars. Today’s GCs have even more tools at their disposal, from legal operations expertise to advanced AI technology platforms that make moving work in-house more viable than ever.

The path forward

The law firms that will thrive in this environment and lead the industry going forward won’t be those resting on 2025’s laurels. They’ll be the ones treating this moment as an opportunity to lock in competitive advantages through investment in technology and innovation.

This means more than just buying AI tools – it requires reimagining service delivery, reviewing pricing models, demonstrating measurable value, and using technology to enhance both efficiency and quality. Law firms that invested heavily in technology and knowledge management during 2025’s profitable run positioned themselves well. Those that continue this trajectory while managing expenses diligently will have the resources to weather whatever comes next.

The environment is changing, but it isn’t hostile – yet. Law firms that are yet to be proactive, and capitalize on the AI era, still have time to innovate and demonstrate their value as clients’ options expand. The real issue is whether law firms will act now to stay ahead of these changes.

Download the Q4 2025 Law Firm Financial Index report here.