Based on Thomson Reuters Institute, 2026 Report on the State of the US Legal Market: “Peak prosperity and the fault lines below.”
If you’re a Practice Group Leader in a law firm, you’re leading in a moment of contradiction.
On the surface, the market looks terrific. Demand surged. Rates hit record highs. Profits grew sharply. The average firm enjoyed 13% profit growth in 2025, with extraordinary profitability gains across segments. But if you read the Thomson Reuters Institute’s new report closely, the headline isn’t “boom.” It’s boom with fault lines. The same forces creating prosperity: geopolitical instability, trade wars, regulatory volatility, are also creating a market that may flip quickly.
For Practice Group Leaders, this is a defining leadership moment. Not because you need to celebrate the performance of the past year, but because your job is to ensure your practice is built for what comes next: a market that may be more chaotic, more value-driven, and more technologically disruptive than anything most firms have faced before.
Here’s what the Thomson Reuters report means for you as a PGL – and what to do now.
The 2025 Legal Market Was a Surge… and a Redistribution
The report frames 2025 as a demand “tectonic moment.” Demand averaged 2.5% growth, with spikes as high as 4.4% in July, and finished the year with 1.9% demand growth—one of the strongest years since the Global Financial Crisis (GFC). But Practice Group Leaders should focus less on total demand and more on where demand moved. Did your firm gain work from larger, more expensive firms or did you lose work to smaller, less expensive providers (whether law firms or others)?
A major theme is “mobile demand” – clients shifting work away from the most expensive firms toward lower-cost firms. In 2025, what they define as Midsize firms surged with nearly 5% demand growth in the second half, while the Am Law 100 struggled to reach 2%, creating the largest demand growth separation between segments since the GFC.
This shift isn’t cosmetic. It’s a buyer reallocation rooted in budget constraints. The report notes that Am Law 100 standard rates cracked $1,000/hour (while others averaged around $600/hour) and the economics became unreachable for many legal departments – at least for major segments of their work.
PGL takeaway: Your practice is no longer competing only your traditional global, national or local peers. You’re competing with other segments of the market (smaller firms and alternative service providers “ALSPs”) that can do similar work at 30–40% less, and the client’s ability to bring work in-house using process, technology, and AI. Take time with your group members to analyze who you obtained work from and what providers they previously used. Why did they select your firm and is it a “permanent” shift or will they move to the next lower priced competitor if budgets continue to be tight?
It Wasn’t “Transactional vs. Counter-Cyclical”—It Was Both
One of the most unusual findings: 2025 featured a simultaneous surge in both transactional and counter-cyclical practices, something that is very rare. Transactional areas like M&A, real estate, and corporate general were strong—but counter-cyclical areas like litigation and labor & employment were also elevated. The report emphasizes that this pattern typically occurs only in periods of severe disruption.
PGL takeaway: This is not a “normal cycle.” It’s a volatility-driven market where legal demand is tied to instability – and that can persist… until it doesn’t. One of the most important elements of an effective practice group is having a group business plan where you have analyzed the market and, with buy in of your group partners, identified no more than 3 goals to pursue. While recognizing that the market could change rapidly, there could never be a more important time to have and be executing on your group plan to differentiate your group and position it to attract clients. Previous blogs on this site have covered the keys to effective practice group planning, and it is covered in detail in my book, The Practice Group Leader’s Handbook for Success.
Rate Growth Hit a Record—and That Is Creating Client Tension
Firms pushed worked rates up 7.3% in 2025, beyond the 7% mark – the fastest pace since at least the GFC. But the report is clear: clients are under extreme pressure. If firms continue pushing rates while clients are being squeezed, the market will not stay cooperative forever.
The report highlights a brewing tension: firms are investing heavily in AI tools that make work faster, but they’re still billing hourly. That creates an “absurd tension” where firms compress 10 hours of work into two hours and then try to bill it under a model designed for time—not value.
PGL takeaway: PGLs must help their partners stop thinking of rates as the only lever. In a market where clients are under stress, rate increases without value clarity accelerates demand migration. What are the clients’ pain points that we are helping to address? Do we do so in a different way than our competitors? Can our partners articulate the value we provide relative to the cost of our services?
The Two Arms Races: Technology and Talent
There is another problem: your practice economics are tightening even in good times.
Technology spending rose nearly 9.7%, and knowledge management tools rose 10.5%—described in the report as a historic acceleration. At the same time, direct spend on lawyer compensation jumped 8.2% in 2025; firms increased headcount 2.9%, and overhead per lawyer also climbed. The report warns: this dual “spend race” is sustainable only if demand and rate growth continue.
PGL takeaway: You are now responsible not only for performance, but for cost structure discipline at the practice level. If you are hiring more lawyers, are you achieving the target levels of utilization of those lawyers (and the ones you already had)? Are the junior lawyers getting meaningful development opportunities so they will add value to clients and will stay long enough to be profitable for the firm? Are we implementing processes and systems that enable our lawyers to practice “at the top of their license” vs. wasting time on lower value work that will be written down?
Buyer Sentiment Is Deteriorating—and That’s Your Early Warning System
This may be the most important part of the report for PGLs: corporate spending expectations are weakening sharply.
Net Spend Anticipation has been sliding to levels not seen since the early pandemic period. And Thomson Reuters Financial Insights forecasts indicate contraction by mid-2026 under baseline conditions. The report also makes a critical distinction: clients will still have legal work. But they will be forced to make brutal choices about who gets their limited dollars.
PGL takeaway: PGLs should act as the early warning system for their firm. You should already be asking: “If our pipeline softens in six months, what breaks first?” What will we do about that? Also, are your members doing everything they can to connect with clients, understand their pain points, create “stickiness” in the relationships and more? When a client is served by more than one practice area, the client is much less likely to leave – yet most firms have a high percentage of their clients only served by one practice group.
What Practice Group Leaders Should Do Now: A 7-Part Playbook
1) Rebuild your group strategy around “portable demand.”
Inventory which matter types are price-sensitive and moveable. Treat demand retention as a strategic discipline. Work on a few key goals to move the group forward, no matter how the market turns.
2) Define and articulate your practice’s value – explicitly.
Clients are increasingly skeptical about “premium pricing.” Translate your value into risk avoided, speed to revenue, cost certainty, and operational relief. Work with your group members to understand and articulate the value they offer to your clients. If they can’t identify what that is, then help them develop the value proposition of working with your group.
3) Stop allowing hourly billing to define your entire practice model (though we know this is easier said than done when the “death” of the billable hour has been predicted for 40+ years).
Develop a menu of pricing models: fixed fees, subscriptions, success fees, and phased fees with scope controls that work for your practice group. Tying the pricing to the value provided to the client will help the client justify your use to their stakeholders.
4) Build AI into delivery—then decide what you will “share.”
Operationalize AI with repeatable workflows and quality standards. Decide where AI creates margin – and where it creates relationship value. Get your group members comfortable using Gen AI and explaining how it is being used to your clients.
5) Treat realization risk as a practice KPI, not a finance problem.
Enforce budgeting discipline, reduce scope creep, standardize matter planning, and train partners to communicate early. Using legal project management/matter management approaches for your group’s matters can differentiate against at least some of your competitors and can increase your margins by reducing write-downs and write-offs.
6) Get ahead of the talent-cost trap.
Protect leverage discipline, reduce “bench drift,” improve staffing accuracy, and reduce rework through repeatable training. Adding more people isn’t an effective strategy unless they are profitable and, if/when they leave, they don’t leave as unhappy alumni – especially if they go to positions in clients.
7) Run crisis simulations – before you need them.
Simulate billing pushback, cash crunches, client insolvencies, and demand softness. Build institutional muscle. Practice these just as you would practice for a difficult deposition (at least when you were more junior) or prepare for trial.
A Focused PGL Action Plan for Q1–Q2 2026
If you do nothing else, do these five things:
1) Identify work clients might easily move from your practice and design a retention strategy.
2) Define your value story in client business outcomes.
3) Pilot two alternative fee arrangements with trusted clients.
4) Operationalize AI use cases with quality control – not hype.
5) Monitor realization and talent (leverage, development, retention, engagement, etc.) as core practice KPIs.
Because the message of the Thomson Reuters report is clear: 2025 was a summit, not a guarantee. The firms—and practice leaders—who treat today’s performance as permanent may be the ones caught most off guard when the market shifts.
The best Practice Group Leaders will do what great leaders always do: enjoy the view, yes—but reinforce the footing. If you are interested in a detailed 2026 action plan based on these trends, email Susan at slambreth@lawvision.com.
Primary Source:
• Thomson Reuters Institute. (2026). 2026 Report on the State of the US Legal Market: Peak prosperity and the fault lines below.
Additional sources cited within the Thomson Reuters report:
• Thomson Reuters Institute. Law Firm Rates in 2026. (October 2025).
• Thomson Reuters Institute. Future of Professionals Report 2025: Actionable Insights for Law Firm Leaders. (June 2025).
• Thomson Reuters Institute. 2025 Generative AI in Professional Services Report. (April 2025).
• Thomson Reuters Institute (with Legal Value Network). 2025 Legal Department Operations (LDO) Index. (September 2025).
• Thomson Reuters Institute / Georgetown Law / Saïd Business School (Oxford). Alternative Legal Services Providers 2025. (January 2025).
• Thomson Reuters Institute. Future of Professionals Report 2024. (July 2024).
• Association of Corporate Counsel (ACC) and Everlaw. Generative AI’s Growing Strategic Value for Corporate Law Departments. (October 2025).
• Thomson Reuters Institute. 2025 C‑Suite Report. (May 2025).
Note: The blog draws all market statistics, forecasts, and direct market claims from the Thomson Reuters Institute 2026 legal market report, which in turn references the additional publications above.
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