Regulation companies dramatically accelerated their know-how investments in 2025, with spending on tech and data administration instruments rising 9.7% and 10.5% respectively — the quickest actual progress seemingly ever skilled within the authorized business, in keeping with the newly launched 2026 Report on the State of the US Legal Market from Thomson Reuters and Georgetown Regulation’s Heart on Ethics and the Authorized Occupation.
The surge in know-how spending comes as companies race to deploy generative AI capabilities whereas concurrently managing document demand progress that noticed billable hours enhance 2.5% for the 12 months, hitting as excessive as 4.4% progress in July. Nonetheless, the report warns that “tectonic forces” within the authorized business are creating basic tensions between transformative know-how investments and outdated billing constructions.
“The tech revolution this time round isn’t the mild cycle that regulation companies skilled when on-line analysis changed sprawling authorized libraries or when electronic mail supplanted fax machines,” the report says. “Such adjustments streamlined workflows however left the elemental apply of regulation untouched.
“Now, the usage of superior AI-driven know-how like generative AI represents one thing totally different: A know-how that may draft briefs, analyze contracts, and synthesize case regulation in methods that may really alter how authorized work will get finished. For an business that’s operated primarily the identical method since Langdell launched the case methodology within the 1870s, that is uncharted territory.”
The know-how spending enhance represents a seven proportion level soar above core inflation, making it essentially the most important funding acceleration since at the very least the worldwide monetary disaster of 2007, the report counsel. Mixed with expertise prices rising 8.2%, companies are making unprecedented bets that AI-enhanced capabilities will justify premium pricing and drive aggressive benefit.
The technique seems to be paying dividends for companies with intentional AI deployment plans, the report says, noting that regulation companies with a proper AI technique are 3.9 instances extra more likely to expertise crucial advantages in comparison with these with out important plans for AI adoption.
The Billing Mannequin Disaster
Regardless of these important know-how investments, the report identifies a basic disconnect: 90% of authorized {dollars} nonetheless movement by way of normal hourly charge preparations, in keeping with information drawn from Thomson Reuters Authorized Tracker. This creates what the report calls “an nearly absurd stress” the place companies deploy know-how that may accomplish work in minutes that after took hours, then attempt to invoice for it by the hour.
“The maths doesn’t work until companies can negotiate charge will increase steep sufficient to offset the effectivity features,” the report states. “Nonetheless, shoppers aren’t desirous to see all their productiveness advantages movement straight to regulation agency earnings. Nor are they ready for the sticker shock of a $2,000 hourly invoice from an affiliate, even when what they’ve achieved in that point might have taken 10 hours to finish beforehand.”
Each regulation companies and their shoppers are locked in a standoff over pricing innovation, the report counsel. Company authorized departments need their exterior companies to suggest billing options that incorporate AI’s efficiencies, whereas companies complain that procurement groups nonetheless consider the whole lot by changing it again to hourly charges.
“Why spend months growing a classy value-based pricing mannequin when the procurement group will simply divide the whole by estimated hours and examine it to final 12 months’s charges?” the report asks.
Making issues worse, most shoppers don’t even know whether or not or how their exterior companies are utilizing gen AI — a disconnect that means neither facet is having sincere conversations vital to interrupt the deadlock.
The Worth Squeeze
The know-how spending surge is going on in opposition to a backdrop of intensifying consumer strain, the report signifies. It paperwork that company authorized departments have led regulation companies in gen AI adoption ever since its introduction in 2022, giving in-house groups firsthand expertise with AI-driven effectivity features.
When GCs see their very own departments utilizing AI to deal with routine work at a fraction of conventional prices, they more and more query why exterior companies charging premium hourly charges are usually not delivering comparable efficiencies.
This dynamic is creating what Thomson Reuters Market Insights analysis calls a “consumer worth squeeze.” Practically 90% of GCs report that useful resource limitations are stopping them from delivering the extent of strategic influence their organizations count on, forcing intense scrutiny over exterior counsel spending.
The strain is mirrored in declining web spend anticipation (NSA) amongst company patrons, which has dropped to ranges not seen because the pandemic struck in 2020. Whereas 41% of patrons at corporations with greater than $1 billion in annual income deliberate to extend authorized spending in Q3 2025, 22% deliberate to lower it — leading to a web anticipation of simply 19%, down from 23% the earlier quarter.
The Cellular Demand Phenomenon
One consequence of those know-how and pricing dynamics is accelerating “cell demand” — the motion of authorized work from the costliest Am Regulation 100 companies to less expensive options. Midsized companies captured almost 5% demand progress within the latter half of 2025, whereas the Am Regulation 100 struggled to crack 2%, creating the most important hole between segments because the World Monetary Disaster.
“With the common Am Regulation 100 lawyer’s normal charges cracking the $1,000 barrier in 2025 — whereas everybody else averaged round $600 — the maths grew to become irrefutable,” the report says. Basic counsel wanted to do much more authorized work with the identical budgets, and shifting issues to companies charging 40% much less offered vital respiration room.
This development has implications for know-how technique. The report notes that companies exterior the Am Regulation 100 grew their charges labored at a tempo equal to or sooner than bigger opponents regardless of important charge disadvantages, suggesting conventional hierarchies could also be essentially shifting.
Expertise investments that allow smaller companies to ship subtle work beforehand reserved for elite practices may speed up this redistribution.
Tech As A Expertise Multiplier
Reasonably than utilizing AI to scale back headcount, as different industries have finished, regulation companies are taking the alternative method. The report finds that if AI augmentation makes legal professionals extra environment friendly and useful, companies imagine this solely will increase manpower’s value.
Lawyer full-time equal (FTE) progress remained sturdy at 2.9% in 2025, marking the third consecutive 12 months of traditionally sturdy hiring.
“Whereas different industries could also be touting AI-induced layoffs to advertise effectivity, the authorized business has chosen the alternative course,” the report says, noting that, since January 2023, the common midsized and Am Regulation second-hundred agency has grown headcount by greater than 8%.
This technique is especially notable for associates, whose realization charges common simply 85.6% and whose work is already being written off at important charges.
“This creates a buffer wherein AI can take in the inefficient parts with out touching collected income,” the report explains. “Companies can automate the work that wasn’t getting paid for whereas protecting associates busy on higher-value duties.”
Warning Indicators Forward
Though the common agency noticed 13% revenue progress in 2025, the report identifies a number of warning indicators for 2026.
Forecasts from Thomson Reuters Monetary Insights level towards steep demand declines, with the center of 2026 probably slipping into contraction. The forecast exhibits quarterly year-over-year demand progress dropping from 2.4% in This autumn 2025 to probably -0.7% by Q3 2026.
Historic patterns additionally elevate issues. The report notes that the authorized business has a “peculiar historic behavior of surging simply earlier than it stumbles,” with comparable demand explosions previous each the 2008 monetary disaster and the 2022 inflation crunch. In each circumstances, companies that mistook momentary peaks for everlasting shifts discovered themselves with bloated value constructions when circumstances reversed.
“Regulation companies have seen this film earlier than, and they need to keep in mind the way it ends,” the report warns. The 2008 disaster didn’t simply crater demand, it essentially rewired the facility dynamic between companies and shoppers, with company authorized departments absorbing Large Regulation expertise and reworking into subtle operations that scrutinized each billing line merchandise.
The Tech Funding Crucial
The report argues that now, through the present increase, is exactly when companies needs to be making strategic know-how investments relatively than ready for the subsequent disaster. Nonetheless, these investments should transcend merely buying AI instruments to essentially rethinking working fashions.
“The query isn’t whether or not conventional working fashions can survive however whether or not regulation companies are dedicated to actually remodel,” stated Raghu Ramanathan, president of Authorized Professionals at Thomson Reuters, in a press release issued by Thomson Reuters together with the report.
The report identifies three crucial transformational shifts required:
- Modernizing pricing fashions that now not match how authorized work is completed.
- Strengthening consumer belief in an atmosphere the place authorized patrons are more and more selective.
- Deploying know-how in ways in which ship measurable worth relatively than advertising and marketing gloss.
ALSP Integration and Service Innovation
The report says that forward-thinking companies are starting to assemble extra artistic options by packaging varied pricing constructions, automated companies, and partnerships with different authorized service suppliers (ALSPs) into complete choices.
ALSP utilization has risen steadily over the previous decade, and main companies are incorporating these suppliers as drive multipliers, the report says.
That stated, North American companies lag behind worldwide opponents on this regard. Simply 27% of legal professionals from North American companies reported that their agency has a non-traditional authorized companies division or companions with impartial ALSPs, in comparison with 76% of legal professionals throughout the UK, Europe, and Australia.
The Worth Communication Hole
Some of the hanging findings of the report is that there’s a hole between agency confidence of their know-how investments and their capacity to articulate worth to shoppers.
Reasonably than citing AI effectivity as justification for charge will increase — which averaged 7.3% progress in 2025, the quickest tempo since at the very least the worldwide monetary disaster — agency leaders specific concern about needing to show they’re nonetheless value present charges in an AI world.
“Their focus is defensive, not offensive, making them seem paralyzed by fears of worth erosion relatively than assured explanations of worth enhancement,” the report says.
Shopper worth extends effectively past sooner turnarounds or extra work per hour, the report suggests. Authorized departments want exterior companies that alleviate present constraints — whether or not that’s by way of sensible instruments shoppers can reuse, seamless group integration or clear hyperlinks between authorized recommendation and enterprise targets.
“For AI effectivity to justify premium pricing, companies should first perceive what worth means to every particular consumer after which show how the agency’s AI deployment serves these explicit wants,” the report asserts.
Dwelling on a Volcano
Whereas earlier demand surges have been tied to financial bubbles, the report says, as we speak’s progress is pushed by instability itself — commerce wars, regulatory chaos, and geopolitical tensions that would maintain authorized demand even by way of financial downturns.
“Seen by way of this lens, the groundswell companies are using means that the bottom beneath them is changing into essentially unstable — much less a mountain than a volcano: a dangerous evolution however nonetheless able to sustaining them by way of a protracted winter,” the report says.
“But dwelling on a volcano carries its personal perils, and companies might finally miss the relative predictability of the occasional tremor.”
The companies that efficiently navigate this atmosphere can be those who use the present increase to essentially reimagine their working fashions — not simply to throw cash at know-how and expertise, however to align their enterprise constructions with the longer term their shoppers are already demanding.
“The regulation companies that may outline the subsequent period of authorized companies can be decided not by how a lot they put money into know-how and expertise, however by how boldly they reimagine their whole working mannequin,” Ramanathan stated. “The winners received’t essentially be decided by measurement or legacy, however they’ll be the companies that act decisively now to align with the longer term their shoppers are already demanding.”
