Thomson Reuters’ recent Law Firm Financial Index report highlights the calm but worry law firms are experiencing: there was global instability swirling all around, but somehow, the LFFI rose four points to 55. That’s not just a number — it’s a sign that clients were leaning hard on their lawyers to help them navigate all the chaos out there. Let’s dig into some of the data from the LFFI report.
Demand Dynamics
Across the board, law firms saw demand grow by an average of 1.6% in Q2 compared to last year. That’s not as wild as the pace we saw in 2024, but it’s still better than people in the industry expected. Demand was also on the rise in Q1, but Q2’s growth was even steadier and less volatile. Legal analysts say this surge in demand was also driven by rising regulatory complexity, as clients sought expert guidance to manage new and evolving rules.
What’s even stranger is how stable that growth was. Weekday-adjusted demand showed the lowest volatility for any quarter since 2020. For an industry that usually experiences some ups and downs, Q2 felt almost unnaturally smooth. This stability was remarkable, showing some of the lowest volatility since the Great Recession. However, experts warn that such calm may be misleading and could signal looming risks for law firms.
Underneath that steady average, there was a lot of motion in specific practice areas. Litigation was the star of Q2, growing 2.0% year-over-year—the fastest of any area. Real estate held steady with 1.7% growth, while M&A sputtered and only managed a weak 0.3%. Tax and labor & employment practices bounced back after a slow start to the year, clocking in at 1.5% and 1.3% growth, respectively. On the flip side, intellectual property shrank by 1.4%, and bankruptcy dipped by 0.7%.
Transactional practices such as M&A and real estate appeared poised for a strong performance in Q1; by Q2, those areas cooled off. Instead, counter-cyclical practice areas (such as litigation, bankruptcy, and labor & employment) gained prominence in Q2. These areas typically thrive during periods of economic uncertainty and indicate underlying market volatility.
Looking at the competitive landscape, midsize and Second Hundred firms continued to lead overall growth, outperforming the traditionally dominant Am Law 100. Am Law 100 firms saw demand slip in Q2, especially in their corporate practices, and kept headcount growth tight, particularly among their top-tier ranks. Meanwhile, midsize and Second Hundred firms cranked up their demand performance across most practices, enough to elevate their “fees worked” above that of the Am Law 100, offsetting Am Law 100 firms’ advantage in that area.
Costs and Profits
Partners aren’t exactly popping champagne corks right now, because there’s still a lot of anxiety bubbling under the surface. Even though revenues look solid on paper, expenses are ballooning, and there are hints that clients might tighten up soon. Direct expenses grew by an average of 7.9% over the past twelve months — a slight uptick from Q1’s already high 7.6%.
Spending on associates is slowing down, but still remains high. Meanwhile, direct expenses per non-associate lawyer are accelerating everywhere except at midsize firms. Overhead costs are another headache — especially for Am Law 100 firms, where overhead surged to an average growth rate of 8.1%. Midsize and Second Hundred firms are also seeing overhead climb fast.
A big part of rising overhead is technology and knowledge management spending. Firms are pouring money into generative AI tools and other tech to stay competitive; technology spend jumped by 8.6%, while knowledge management spend soared by 11.2%. These investments are now considered essential, not optional, for firms seeking to deliver value to increasingly demanding clients.
Other Indicators
Another potential storm cloud was collected vs. work realization rates. Realization rates dipped slightly in Q2 to 90%, bucking normal seasonal trends and suggesting clients could be getting more careful with their cash even as they need more legal help than ever. More alarmingly, this dip could be the round of polite ghosting that precedes an eventual collections bloodbath, foreshadowing significant challenges in collections and cash flow management.
What about productivity? Measured by hours worked per lawyer, productivity dropped by an average of 1.3% in Q2 compared to last year, though this was a smaller dip than in Q1. However, a 7.4% jump in average worked rates more than made up for it, resulting in lawyers generating about 6.3% more fees than at this point last year, which was already considered a banner year for revenue.
The Bottom Line
Right now, law firms are still finding ways to grow, since lawyers play a key role in helping businesses adapt to change. But there’s a real chance that a recession could be around the corner. If you look back at past economic slumps, you’ll see a pattern: when things go south, revenue can drop off fast, but expenses don’t budge as easily. That means profits can get squeezed pretty quickly if the market takes a turn.
Bottom line? The second quarter of 2025 gave law firms a rare moment of peace amid global chaos—but history says storms can roll in fast when you least expect them. If you’re running a firm right now, best keep your umbrella handy just in case.
Related Resources:
- The Financial Health of Law Firms Is Approaching Unparalleled Ground (FindLaw's Practice of Law)
- Wisconsin State Bar Settles Suit by Scraping DEI Program (FindLaw's Practice of Law)
- New York Won't Let a Little Thing Like a Heart Attack Get in the Way of the Bar Exam (FindLaw's Practice of Law)
