Transactional and counter-cyclical demand soared across firms of all sizes
The current trade battle has enhanced demand in “just about every major practice area,” according to Thomson Reuters’ Law Firm Financial Index for Q1 2025.
Transactional and counter-cyclical demand soared late in the first quarter of the year, particularly in March, bolstering practice areas like litigation and tax. Worked against collected realization closed at a higher figure in Q1 2025 than Q1 2024 for the first time in two years, suggesting that clients are less resistant to 2025’s rates compared to the previous year.
The average law firm increased worked rates by 7.3 percent compared to the previous year; mid-size to Am Law 100 firms recorded their most aggressive rate hikes since 2005, the report noted.
However, the LFFI score for this quarter slipped to 51 points – a decline of 13 points. This suggests a challenging future ahead, according to Thomson Reuters; even with heightened client demand, law firm profitability could nosedive. Compensation-related direct expenses increased by 7.6 percent in Q1, exceeding the average law firm’s average rate growth as firms pay out performance bonuses from the previous year and compete for talent. Moreover, overhead costs ticked up by 6.3 percent.
Productivity also dipped by 2.4 percent due to having one less working day than last year. The merger and acquisitions market also faltered relative to expectations.
According to Thomson Reuters, the trade conflict improves short-term demand but creates additional risks for future transactional demand.
The economic outlook for the US has declined significantly compared to the previous quarter as expectations of instability, inflation, and recession rose. A weakening economy could in the long run slow down transactional work, which typically supports the performance of large law firms. Thomson Reuters pointed to the 2007 Global Financial Crisis, which also initially resulted in robust demand for law firms before available work declined and firms had to spend the better part of 10 years restoring demand.
“As law firms continue to navigate the complex landscape highlighted by geopolitical and economic challenges, they must stay focused on strategic growth and investing in the technological revolution that is underway. Doing so signals a commitment to excellence and efficiency but also strengthens their position in the evolving legal landscape,” said Raghu Ramanathan, Thomson Reuters’ legal professionals president, in a statement.
The Q1 2025 LFFI report is a composite index of law firm market performance generated by the Thomson Reuters Institute. The report utilized Financial Insights data pulled from major US firms and international markets.
