Law firms saw strong profits in 2024, study finds, but demand expected to ebb in 2025

 

Jan 7 (Reuters) – Strong demand across practice areas, higher billing rates and the expansion of non-equity partner tiers helped bolster law firm profits in 2024, according to a new analysis, opens new tab of firm financials by the Thomson Reuters Institute.

But a potential decline in demand — coupled with rising expenses and challenges to the traditional billable hour model spurred by the growing use of generative AI — could chip away at law firm profits this year, the study warned.

This year, firms will need to “navigate a complex landscape shaped by shifting demand and expense dynamics,” reads the study, which was co-authored by the Georgetown Law’s Center on Ethics and the Legal Profession and is based on financial data through November from 183 U.S.-based large and midsize law firms. The Thomson Reuters Institute and Reuters share the same parent company.

Profits-per-lawyer increased by an average 8% over the previous year among those firms following a sluggish 2023, according to the study. Profits-per-equity-partner were up nearly 12% due in part to an increase in non-equity partners.

Non-equity partners were slightly more than 14% of firm attorneys, on average, between 2005 and 2009, according to the report. That figure is now more than 19%.

Average demand growth among firms hit 2.6% in 2024 — an increase the report’s authors deemed “incredibly atypical,” given the average demand growth between 2007 and 2023 was 0.1%. That demand growth was spread across a wide array of practice areas, including litigation, labor and employment, corporate, real estate and bankruptcy. Both large and midsize firms enjoyed higher demand for their services in 2023, the study found.

But ever-higher demand is no guarantee in 2025, the report warned. The report predicts that demand will likely weaken this year, noting that law firms have historically struggled to maintain long-term growth. However, the recent U.S. election and geopolitical and economic uncertainty could result in short-term demand growth, the report adds.

“We’re not necessarily saying that the bottom is going to fall out, but some of these practices may not be as strong,” said William Josten, manager for enterprise legal content at the Thomson Reuters Institute.

The ability to firms to continue raising rates is another open question. The average billing rate rose 6.5% in 2024, the study found, which is double the pace of rate growth over the past decade. As inflation wanes, law firms may have a tougher time justifying rate hikes to clients.

Law firm expenses rose more than 5% in 2024 in part due to high spending on technology and generative AI. The accelerated adoption of those programs, which are trained on vast amounts of text and legal documents and can produce human-like text, could challenge the dominance of the billable hour in the law firm arena, the report found. If generative AI technology can improve lawyer efficiency, clients may insist on being charged less.

“It is becoming increasingly obvious that the legal profession must rethink how it defines value when pricing legal services,” the report reads.

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REUTERS