Rising US law firm expenses offset strong demand and rate hikes in first quarter - report

By Karen Sloan

May 13 (Reuters) - Strong demand and billing rate hikes didn’t translate into major economic gains for U.S. law firms in the first quarter of 2026, new financial figures show.

Rising expenses — including investments in artificial intelligence — and falling productivity cut into what otherwise would have been a highly profitable quarter, according to the Thomson Reuters Institute’s latest Law Firm Financial Index, released on Wednesday. The Thomson Reuters Institute and Reuters share the same parent company.

The “average” economic picture for law firms in the first quarter suggests that 2026 may not replicate 2025’s notable financial gains, said Bryce Engelland, a senior industry data analyst with the Thomson Reuters Institute. But it’s too soon to tell how the year will play out, he added.

“We see it as things are still looking good, but there is the reason to look with trepidation at the clouds and maybe keep an umbrella handy,” Engelland said.

The war in Iran is a factor. Geopolitical instability typically bolsters law firm demand, but that hasn’t been the case thus far. M&A work pipelines stalled in March as “dealmakers waited for clarity” while the restructuring activity that historically surges during times of disruption didn’t materialize, according to the index.

“We don’t yet know whether this war effect is temporary or structural; and it’s what we’ll be watching most closely in Q2,” the index reads.

The index compiles quarterly financial metrics from 195 large and mid-sized U.S. law firms on key factors such as demand, productivity, billing rates and expenses.

Demand was up an average 2.7% year-over-year — an unusually steep increase. M&A demand increased 4.4% from the first quarter of 2025, while litigation and all corporate work were both up 2.9% over the previous year.

Firms raised their billing rates, continuing their upward climb over last year’s already robust gains. Billing rates were up 9.8% among the 100 U.S. firms ranked highest in revenue by the American Lawyer, though midsized firms were more measured with a 5.3% year-over-year rate growth.

But law firm expenses rose across the board, tempering financial gains. Direct expenses were up 8.1% over the previous year while overhead expenses climbed 8.3%, according to the index. Much of that overhead spending growth stemmed from investments in technology, including artificial intelligence.

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