The 2025 Report on the State of the U.S. Legal Market from the Center on Ethics and the Legal Profession at Georgetown University Law Center and the Thomson Reuters Institute is packed with good news for law firms. It also highlights recent and upcoming shifts in the industry that law firms cannot afford to ignore.

The topline takeaway of the report perhaps is that law firms increasingly have begun to recognize that the practice of law is not just a profession — it also is a business. Nonetheless, the report warns, most firms still cling to management practices developed in different times, including traditional partnership models and the emphasis on billable hours. That, it maintains, must change.

A Very Good Year

The industry as a whole had a lucrative year in 2024, with the average law firm expanding its profit by lawyer by 8.3%. Profits per equity partner skyrocketed, with 11.6% growth over 2023.

The profitability was driven in part by a historic surge in demand. The average law firm saw a 2.6% growth in demand over the already strong demand of 2023. Even better, the demand was high across a variety of practices — including transactional practices that had lagged in the previous year.

Litigation demand grew 3.3%, and labor and employment moved up 1.9%. The growth in these areas more than made up for the “moderate deceleration” in smaller practices (for example, bankruptcy and patent prosecution), and the spike in demand was seen across market segments. Midsize, Am Law 100 and Am Law Second 100 firms all enjoyed increased demand.

The surge in demand proved particularly profitable as billing rates advanced at their fastest pace since the Great Financial Crisis. Even as inflation leveled off, rates averaged 6.5% growth. Moreover, the report found minimal pushback from clients and relatively stable realization rates.

The report suggests the rate growth may be due changes in law firm hiring. It notes that, over the past couple years, firms are turning less to new associates and more to experienced laterals. Two-tier partner structures are becoming more common, too. As a result, these firms have become more “top heavy” and the average rate they charge has climbed.

Rising Expenses

According to the report, 2024 also was historic in terms of expense growth. The average expense growth was 5.9% for direct expenses and 5.5% for overhead — versus 3% for each category from 2012 to the beginning of the COVID pandemic in 2020. In a break from tradition, though, the growth was not driven by associate costs or inflation.

Rather, the report characterizes the higher expenses as “table stakes” for firms both doggedly pursuing the many business opportunities available and adapting to the rapidly evolving technological environment. Expenses related to knowledge management, outside services, and marketing and business development exceeded historical averages.

Spending on technology is “growing at an unprecedented rate.” Firms are updating and maintaining their data management and processing systems, which are critical to making the most of generative AI, and the report says new AI technology probably will require more new investment. Many firms will experience a transition period during which they must support for their new and their old systems.

The report advised law firms to begin developing long-term plans to deal with the escalating costs now. Options include collaborative initiatives and the use of simulation and modeling tools to determine the implications of new technologies before adopting them.

A Critique of Billable Hours

The report criticizes the continuing reliance on the billable hour “as the organizing assumption of law firm economics, value and structure.” A pricing model based on the billable hour, it asserts, prioritizes time spent over results and fails to reflect the spread of automation.

The report points to the rapid proliferation of AI technologies in support of its argument that law firms should move to value-based pricing models. With generative AI significantly improving the efficiency of the performance of legal tasks, clients are likely to insist on price reductions, especially if the value of these services performed are measured on a time-spent basis.

Notably, the American Bar Association’s Standing Committee on Ethics and Professional Responsibility recently stated that, while generative AI tools might provide attorneys quick and more efficient methods to render legal services, “lawyers who bill clients an hourly rate for time spent on a matter must bill for their actual time.” For example, if an attorney drafts a pleading using a generative AI tool, spending 15 minutes entering the relevant information into the program, the attorney should charge for the 15 minutes, plus any time sent reviewing the AI’s output.

The report also opposes the role of billable hours in evaluating attorney performance — because the system “undervalues genuine productivity and efficiency.” The authors encourage the development of new productivity metrics to replace the billable hour.

Looking Ahead

The report concludes on an optimistic note. Despite “unprecedented changes,” law firms succeeded financially in 2024, and the authors are convinced that firms are well positioned to take advantage of the coming technological challenges and reap further dividends.

For more information, contact Joy Long at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.