While transactional practices recently showed promise compared to counter-cyclical practices late last year, fluctuating demand amid current political and economic changes potentially suggests a return of 2024’s environment for law firms
The precipitous drop in the first quarter’s Law Firm Financial Index (LFFI) — a measure of law firm industry financial health tracked by the Thomson Reuters Institute — that resulted in a 13-point decrease in Q1 2025, compared to Q4 2024, may not yet indicate any industry-scale risk, but it is a reflection of weakened law firm performance compared to a historically strong 2024.
The first quarter of this year had some bright spots for certain law firm financial metrics, particularly in terms of demand and worked rates. However, Q1 also brought concerns about demand patterns that differed from what was previously anticipated — and this is particularly important development for law firms that are looking to maximize gains in the coming months.
Why demand in 2024 was so successful
In 2024, the average law firm saw an increase in legal demand growth of 2.8%. Indeed, last year’s acceleration was remarkable, being the second fastest annual growth since 2008 and was particularly noteworthy given 2023’s growth of just 0.8%. The only comparable rise occurred in 2021, which saw a 3.7% growth largely due to the rebound from the 1.6% decline that came as a result of the global pandemic that began in 2020.
In addition to 2024’s substantial expansion, which built on an already solid performance in 2023, last year’s growth originated from a broad range of practices. The demand surge for counter-cyclical practices that started in 2023 persisted throughout 2024, becoming even more pronounced, especially in the practice areas of litigation and labor & employment.
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While counter-cyclical practices continued to be the primary source of growth in 2024, this was the year in which transactional practices finally showed signs of life, which was one of the legal industry’s most anticipated comeback stories. Throughout 2022 and 2023 transactional practices had remained in negative territory, but in 2024, the group of practices finally saw expansion. The two main drivers of this performance were corporate and real estate, which saw considerable gains last year. Still, tax finished the year with flat growth and M&A remained in contraction.
2024’s late corporate resurgence
It wasn’t until Q4 2024 that the legal industry started to see a shift in demand trends. While litigation continued to exhibit significant strength in the market, Q4 was the first time in nine consecutive quarters that corporate work grew faster than litigation, likely hinting the resumption of the transactionally driven demand environment that law firms experienced during most of the last decade. The only question at that moment was whether the transactional demand comeback would be able to make up for the deceleration of counter-cyclical practices that also occurred in Q4, which would allow law firms to sustain their strong growth in demand throughout 2025.
Volatility in Q1 upends the transactional comeback
Transactional practices’ surge over counter-cyclical ones that began in Q4 2024 had the potential — to the hopes of many law firm leaders — that this trend would become a new reality within the legal industry, heralding a return to the prior transactional work-dominated status-quo.
And while the start of 2025 did bring a modest growth of 0.5% in overall demand, it also brought a hefty dose of political and economic changes in the United States. So, even though transactional demand continued to accelerate faster than counter-cyclical in Q1, from a monthly perspective, the data suggests that this trend could be coming to an end sooner than many had hoped.
Since October 2024, weekday adjusted demand growth showed transactional practices gaining a substantial advantage over their counter-cyclical counterparts. Yet, by March, the gap in performance between the two groups only narrowed to almost zero.
What is interesting yet unsurprising about this trend is that the shift happened only after the new administration of Donald J. Trump took office and started announcing impactful actions on the broader economy, bringing volatility into the markets. What March’s outcome could be telling observers is that this uncertainty has started to impact demand from clients, as they seek legal protection from anticipated regulatory changes, leading to disputes over compliance, adding to clients’ financial stress, and finally resulting in disagreements over contracts, financial obligations, or other types of business dealings. In that event, a resurgence in demand for counter-cyclical practices during the second half of 2025 would not be surprising.
What to expect in the future
Today, demand in the legal industry stands solid, not quite at the highs of 2024, but neither is it on the negative trajectory that December 2024 and January 2025 suggested. Indeed, the late surge in Q1 should give firms some solace that there aren’t significant signs of weakening. Still, the legal market cannot ignore that the recent economic, commercial, and geopolitical uncertainty has impacted their business and may continue to do so, especially as clients’ needs change.
Further, some of the policies proposed from the Trump administration, if enacted, could hinder overall economic activity, affecting industries, including law firms, in many different ways.
Given the environment, law firm leaders would do well to monitor and study these industry trends frequently to better understand from where the sources of growth are originating and how and which of their clients’ businesses and industries will be impacted by government regulatory and legislative policy changes.
Being able to leverage this type of insight can be a game-changer for law firms — because for every challenge there also comes opportunity.
You can download a copy of the recent Q1 2025 Law Firm Financial Index from the Thomson Reuters Institute, here
