Are Midsize Firms Missing Out Amid Record-Breaking Rate Increases?
A Surge in Rates, but Not All Firms Cash In
As law firms across the U.S. push billing rates to historic highs in 2025, midsize firms are seeing strong demand but may be leaving significant revenue on the table due to inefficiencies in billing, collections, and technology adoption. The Thomson Reuters Institute’s 2025 State of the US Legal Market Report highlights a legal industry riding a wave of 7.3% average worked rate growth in Q1, yet midsize firms’ cautious strategies and operational gaps could be costing them millions.
Unpacking the Rate Surge
Record-High Rate Increases
In Q1 2025, law firms achieved a 7.3% increase in worked rates—the highest since 2008—driven by demand spikes in litigation and transactional work, including tax and trade war-related matters. Am Law 50 firms led with 10.2% rate growth, while midsize firms, defined as those outside the Am Law 200, saw a still-impressive 5.1% increase, up from 3.8% in 2022. This acceleration reflects a shift from historical conservatism, with midsize firms responding to a competitive talent market and rising client expectations.
Demand Strength
Midsize firms enjoyed a 2.8% demand growth through mid-2023, outpacing Am Law 100 counterparts, fueled by counter-cyclical practices like bankruptcy and labor law. This demand, coupled with higher rates, has boosted fees worked (hours multiplied by rates) to record levels, positioning midsize firms for robust revenue potential.
Why Midsize Firms Are Leaving Money Behind
Billing and Collection Inefficiencies
Despite rate hikes, midsize firms struggle to capture their full revenue. The 2025 Legal Industry Trends Report by RunSensible notes that 14% of billable hours go unbilled, and 10% of billed fees remain uncollected, equating to nearly a quarter of potential revenue lost. For example, a midsize firm with $10 million in billable work could lose $1.4 million due to unbilled hours and $1 million from uncollected fees. These gaps stem from:
- Manual Billing Processes: Many midsize firms rely on outdated systems, leading to errors or delays in invoicing.
- Lack of Discipline: Firms often fail to enforce timely payments or audit realization metrics regularly.
Technology Lag
Midsize firms trail larger peers in adopting technology to streamline operations. The Thomson Reuters report highlights that while Am Law 100 firms invest heavily in AI-driven tools for document review and pricing analytics, midsize firms’ slower adoption limits efficiency. For instance, automation tools like e-billing and online payment systems could boost collections by 15–20%, but only 30% of midsize firms have implemented such solutions. This reluctance, dubbed “technophobia” by Above the Law, results in lower realization rates (90.5% in Q2 2024 vs. 89.6% in Q1) compared to smaller firms leveraging tech for agility.
Conservative Rate Strategies
Midsize firms have raised rates but remain cautious compared to Am Law 100 firms, which pushed near-double-digit growth. This restraint helps maintain a cost advantage—midsize firms’ rates are 20–30% lower than larger peers—but it also means forgoing revenue potential. The 2025 State of the US Legal Market Report suggests midsize firms could advocate for higher rates without losing clients, given strong demand, but fear of pushback holds them back.
Impact on U.S. Clients and Firms
For Clients
Midsize firms’ lower rates offer cost savings for clients, particularly small businesses and individuals, compared to Am Law 100 firms charging $800–$1,200 per hour for partners. However, inefficiencies may lead to inconsistent billing, frustrating clients who expect transparency. If midsize firms pass on rising operational costs (up 7.6% in Q1 2025 due to talent wars and tech investments), clients could face higher effective costs despite the GST exemption on insurance reducing some financial burdens.
For Midsize Firms
The revenue leakage from unbilled hours and uncollected fees squeezes profit margins, already strained by rising associate salaries (up 29% from 2021–2023) and overhead costs like technology and office leases. Midsize firms’ productivity, while up (61% of time spent on billable work in 2023 vs. 56% in 2022), lags behind potential gains from automation. Firms adopting e-billing and workflow tools report up to 20% higher revenue, suggesting a clear path to closing the gap.
Economic Context
The legal sector’s rate surge occurs amid broader economic pressures, including Trump’s tariffs and trade wars, which have increased demand for legal services in trade compliance and litigation. Midsize firms, with their agility and lower cost structures, are well-positioned to capture this demand but risk losing ground to larger firms with advanced tech and aggressive pricing.
Expert and Public Perspectives
Legal analysts like those at Thomson Reuters urge midsize firms to “get comfortable advocating for higher billing rates” and invest in technology to match BigLaw’s efficiency. On X, sentiments vary: @LegalEagle2025 praises midsize firms’ cost advantage but warns that “failing to modernize will cost them clients.” Others, like @LawBizInsider, note that midsize firms’ “personalized service” remains a draw, but only if billing inefficiencies are addressed.
Looking Ahead: Closing the Revenue Gap
Midsize firms stand at a crossroads. To capitalize on 2025’s rate increases and demand growth, they must:
- Adopt Technology: Invest in AI tools and e-billing to boost realization rates to 95% or higher, adding millions to revenue.
- Enforce Billing Discipline: Regular audits and online payment options can reduce uncollected fees, as seen in firms reporting 15% faster client conversions with automation.
- Push Rates Strategically: Gradually align rates closer to Am Law Second Hundred (7.7% growth in 2024) without sacrificing affordability.
If midsize firms address these gaps, they could turn record rate increases into record profits. Failure to act risks ceding market share to tech-savvy competitors, both large and small, in an increasingly competitive legal landscape.
Conclusion
Midsize law firms are riding a wave of unprecedented rate hikes and demand in 2025, but inefficiencies in billing, collections, and technology adoption are leaving millions on the table. By embracing automation, enforcing stricter billing practices, and advocating for competitive rates, these firms can maximize their revenue potential. As the legal market evolves amid economic and political shifts, midsize firms’ agility could be their greatest asset—if they seize the moment.