Law Firms Face Surging Costs in 2025, But Revenue and Demand Increases Remain ‘Good News’
In 2025, the U.S. legal industry is navigating a complex financial landscape marked by soaring operational costs but buoyed by robust revenue growth and steady demand for legal services. A recent report from Citi Global Wealth at Work, published on August 18, 2025, highlights that law firms experienced a double-digit revenue increase and a 1.1% demand growth in the first half of the year, outpacing expense growth despite challenges like rising salaries and technology investments. This article explores the dynamics driving these trends, their implications for law firms, associates, and clients, and the broader context of the legal market’s evolution. It also examines how firms are adapting to economic pressures, technological advancements, and client expectations, while forecasting future trends in the U.S. legal sector.
Surging Costs: The Price of Growth
Rising Salaries and Talent Wars
One of the primary drivers of escalating costs in 2025 is the sharp increase in associate salaries, particularly at large and midsize firms. Between 2021 and 2023, median starting salaries at firms with fewer than 100 lawyers jumped by 29%, and this trend has continued into 2025 as firms compete for top talent in a tight labor market. The legal industry’s focus on attracting and retaining skilled attorneys has led to significant salary hikes, with some Am Law 100 firms offering first-year associates salaries exceeding $225,000, alongside substantial bonuses.
This “talent war” is compounded by a 44% concern among law firm leaders about attracting and retaining talent, identified as the biggest challenge for 2025 in a NatWest Legal Report. Higher salaries, while necessary to secure top-tier attorneys, are squeezing profit margins, particularly for smaller firms with less financial flexibility. Direct expenses, including associate compensation, rose 7.9% in Q2 2025, according to the Thomson Reuters Law Firm Financial Index (LFFI), further straining budgets.
Technology Investments: A Double-Edged Sword
Law firms are also grappling with significant investments in technology, particularly generative artificial intelligence (AI), which has surged in adoption. In 2024, AI usage among lawyers jumped from 19% to 79%, with 93% of midsize firms now using AI tools for legal research, document drafting, and case management. These investments, while boosting efficiency, contribute to overhead costs, which increased 6.9% in Q4 2024. Firms are spending heavily on cloud-based practice management, cybersecurity, and client portals to meet client demands for transparency and efficiency, but these costs are not always offset by immediate revenue gains.
The Thomson Reuters Institute’s 2025 State of the US Legal Market Report describes these expenses as “the cost of chasing opportunity,” emphasizing that investments in technology and knowledge management are strategic moves to capture market share and enhance competitiveness. However, the report warns that firms risk “technological debt” if they rely on outdated systems, which could hinder long-term profitability.
Real Estate and Operational Costs
The return to office mandates, such as DLA Piper’s recent increase to four days per week for U.S. corporate lawyers, has driven up occupancy costs, particularly for Am Law 100 firms. While costs like office leases have normalized since the inflation spikes of 2022–2023, maintaining large office spaces in urban centers remains a significant expense. Additionally, rising energy costs and the need for modernized office infrastructure to support hybrid work add to the financial burden.
Revenue and Demand: The Silver Lining
Double-Digit Revenue Growth
Despite rising costs, law firms have seen remarkable revenue growth in 2025. The Citi report notes a double-digit increase in revenue for the first half of the year, driven by a 9.5% rise in billing rates and a 1.7% increase in demand. This follows a stellar 2024, where U.S. law firm revenue grew nearly 13%, the second-best performance since the 2008 financial crisis, according to Wells Fargo’s Legal Specialty Group. Among the Am Law 50, revenue surged 13.9%, fueled by high demand in private equity and capital markets.
Billing rate hikes have been a key driver, with Am Law 100 firms leading the market at an 8.4% increase in worked rates through mid-2024, a trend continuing into 2025. Firms have justified these increases by citing the premium on specialized expertise in areas like litigation, corporate law, and cybersecurity, where clients value high-quality service amid complex regulatory environments.
Steady Demand Growth
Demand for legal services rose 1.1% industry-wide in the first half of 2025, a modest but positive figure compared to the 0.7% growth in 2023. Litigation, labor and employment, and bankruptcy practices have driven much of this demand, with litigation seeing a 2.0% increase in Q2 2025. Transactional practices, such as mergers and acquisitions (M&A), have also rebounded, particularly in Q4 2024, with a 4.0% growth in corporate work. However, the Thomson Reuters Institute predicts that demand may weaken in 2025 due to economic uncertainties, including high interest rates and geopolitical tensions.
Regional markets, particularly in Texas, have outperformed others, with Houston and Dallas firms reporting significant revenue and headcount increases due to a thriving economy and demand in energy and technology sectors. This regional boom underscores the uneven distribution of demand, with larger markets benefiting more than smaller ones.
Implications for Stakeholders
For Law Firms
The combination of surging costs and robust revenue presents both opportunities and challenges. Large firms, particularly Am Law 50, are better positioned to absorb cost increases due to their scale and diversified practice areas. However, midsize and smaller firms face tighter margins, as rising salaries and technology costs outpace their ability to raise rates without losing clients. To maintain profitability, firms are adopting strategies like:
- Non-Equity Partner Expansion: Non-equity partner tiers grew to 19.1% of firm attorneys in 2024, up from 14.3% in the mid-2000s, allowing firms to retain talent while controlling costs.
- Alternative Fee Arrangements: Flat fees and subscription billing are on the rise, with 64% of midsize firms offering flat-fee options to meet client demands for predictable costs.
- Billing Discipline: Firms are implementing e-billing and online payment systems to reduce the 10% of invoiced amounts that go unpaid, improving realization rates.
For Associates
Associates benefit from higher salaries and bonuses, particularly in Big Law, where year-end bonuses matching Milbank’s scale are expected despite softer demand for corporate associates. However, increased office mandates and workload pressures may exacerbate burnout, especially for junior lawyers. The emphasis on in-person collaboration, as seen in DLA Piper’s policy shift, could strain work-life balance, prompting some to seek opportunities at firms with more flexible arrangements.
For Clients
Clients face higher legal fees due to billing rate increases, with an industry-wide average of 6.5% in 2024, projected to continue into 2025. This has led to pushback, with nearly 50% of firms reporting client resistance to rate hikes. Clients are demanding transparency and value, pushing firms toward alternative fee structures like flat fees, which 71% of legal consumers prefer for cost predictability. Large corporations are also outsourcing to midsize firms for cost efficiency, driving growth in that segment.
Broader Context: A Dynamic Legal Market
The 2025 legal market reflects a tension between growth and sustainability. The U.S. legal services market, valued at $396.80 billion in 2024, is projected to grow at a compound annual growth rate (CAGR) of 2.5% through 2030, driven by demand for compliance, data privacy, and M&A expertise. However, economic uncertainties, including high interest rates and a volatile real estate market, could dampen transactional demand in 2025, forcing firms to rely heavily on rate increases for revenue.
Generative AI is reshaping the industry, with 74% of billable work potentially automatable, threatening traditional hourly billing models. Firms adopting AI-driven tools report up to 20% higher revenue and 15% faster client conversion, but the upfront costs of implementation remain a hurdle. Additionally, geopolitical factors, such as policies from the incoming Trump administration, could impact cross-border deals and regulatory compliance, further influencing demand.
Future Trends: Adapting to a New Normal
Looking ahead, law firms must balance cost management with innovation to sustain growth:
- AI Integration: Firms will deepen AI adoption for routine tasks, freeing lawyers for high-value work, but must navigate pricing challenges as billable hours decline.
- Flexible Billing Models: Subscription and flat-fee arrangements will grow, particularly for small and midsize firms, to meet client demands for cost certainty.
- Talent Retention: Offering hybrid work options and mental health support will be critical to retain associates, especially younger lawyers prioritizing flexibility.
- Regional Growth: Markets like Texas will continue to lead, with firms expanding into fintech, renewable energy, and international trade law.
The U.S. Supreme Court or Congress may also influence the legal landscape by addressing issues like AI regulation or labor laws, impacting firm operations and client expectations.
Legal and Practical Considerations
For firms, managing costs requires strategic investments in technology and talent while avoiding over-leveraging. Smaller firms may need to merge or specialize to compete. Associates should negotiate for flexible work arrangements and document contributions to secure bonuses. Clients can leverage competition among firms to demand cost-effective services, particularly from midsize firms offering specialized expertise at lower rates.
Legally, firms must ensure compliance with wage-and-hour laws as office mandates increase, avoiding potential Fair Labor Standards Act (FLSA) violations. Additionally, robust cybersecurity measures are critical to protect client data amid rising digital threats.
Conclusion: A Resilient but Challenged Industry
The U.S. legal industry in 2025 is thriving, with double-digit revenue growth and steady demand signaling resilience. However, surging costs from salaries, technology, and real estate pose challenges, particularly for smaller firms. By embracing AI, alternative billing, and strategic hiring, law firms can navigate these pressures while meeting client expectations for value and efficiency. As economic and geopolitical uncertainties loom, the industry’s ability to adapt will determine its trajectory, ensuring that the “good news” of revenue and demand growth translates into sustainable profitability.