The Thomson Reuters Institute recently analyzed law firm financials and highlighted strong profits in 2024, driven by high demand across multiple practice areas, increased billing rates, and the growth of non-equity partner tiers. However, the report also warns that potential challenges, such as declining demand and rising expenses, could impact profits in 2025.
Boost in Profits and Demand
Law firms experienced a significant boost in profits in 2024. Profits-per-lawyer rose by an average of 8%, while profits-per-equity-partner surged nearly 12%. This increase resulted partly from a rise in the number of non-equity partners. Non-equity partners now make up over 19% of firm attorneys, compared to just 14% from 2005 to 2009.
Demand for legal services saw an atypical growth rate of 2.6% in 2024, far exceeding the 0.1% average growth between 2007 and 2023. This demand spanned various practice areas, including litigation, labor and employment, corporate, real estate, and bankruptcy. Both large and midsize firms benefited from this surge in demand.
Challenges Looming in 2025
Despite the strong performance in 2024, the report predicts that demand may weaken in 2025. Historically, law firms have struggled to sustain long-term growth, and geopolitical and economic uncertainties could impact short-term demand. William Josten, manager for enterprise legal content at the Thomson Reuters Institute, noted that while some practice areas may not maintain their strength, the overall situation doesn’t suggest an immediate downturn.
The ability of firms to continue raising rates also remains uncertain. Although billing rates rose by 6.5% in 2024—double the average rate increase over the past decade—waning inflation could make it harder for firms to justify future hikes.
The Impact of Generative AI and Rising Expenses
Rising expenses, driven by investments in technology and generative AI, also pose a challenge. Law firm expenses increased by more than 5% in 2024 due to these high-tech expenditures. Generative AI, which can process large volumes of legal texts and produce human-like content, threatens the traditional billable hour model. As this technology improves efficiency, clients may demand lower fees, pushing firms to rethink how they price legal services.
The report emphasizes that the legal profession must redefine value in pricing, as generative AI continues to reshape the landscape. Firms will need to navigate these complexities carefully to maintain profitability in the evolving legal market.
