“2025 State of the US Legal Market” analysis: The cost of chasing opportunity

Solid growth in legal demand and rates has dominated much of the discussion on the recent success of the law firm market. As the 2025 Report on the State of the US Legal Market revealed, expenses are also a high-growth area, and one that could actually help firms position themselves for continued success.

The strong demand and rate growth in 2024 was accompanied by expense growth that remained high by historical norms, although it has cooled off considerably from the inflation-driven cost spikes seen in 2022 and 2023.

The temptation may be to assume that further belt-tightening is in order to drive greater profitability, or that firms are giving up some of their gains in demand and rates on the back end because of high expenses.

In truth, the opposite may actually be the case. Deeper analysis shows that current expense growth may largely reflect firms’ opportunistic spending, which in turn is helping firms to capture a share of the growing market demand.

Expense breakdown

It’s important to breakdown what the current major drivers of overhead expense growth are — indeed, much of the expense spike in 2022 and 2023 was attributable not only to inflation but also to return-to-office costs. Yet today, associated expense categories such as occupancy and office expenses have since generally normalized, and cost controls are largely succeeding in reining in these expenses across most firm segments.

The exception is Am Law 100, in which many firms may still be focusing on getting more lawyers back in the office.

The current high-growth expense categories are largely business development & marketing, knowledge management, and technology — spend that is intended to enable firms to capture more business and then perform the work more efficiently. Firms are largely in unison in increasing their spend for these categories, with Am Law 200 firms leading in terms of driving those investment growth rates as well as in support staff compensation.

Overall, many law firms are increasing investments into the overhead categories that drive capacity and differentiation of legal service delivery when it comes to technology and knowledge management, and in further growth with business development & marketing.

The cost of chasing opportunity

The recent State of the Legal Market report refers to these types of expenses as “The cost of chasing opportunity” and states:

“Higher expenses appear to be the table stakes for firms chasing the cornucopia of business opportunities available to them, as well as the cost of adapting to a shifting technological environment.”

The challenge will be how firms respond if demand growth begins to taper off from the historic broad-based growth of 2024, as Thomson Reuters Financial Insights is predicting may happen in 2025.

Regardless of where demand trends go from here, indications are that firms will continue to invest strongly in technology. The combination of inflation and deferred spending because of the pandemic caused high volatility in tech spend from 2020 to 2023. The gap between tech spend and inflation is now back to normal levels or even slightly higher than before, making this high level of tech spend a key part of the aforementioned table stakes for firms going forward.

We expect tech spend to further increase as GenAI investments become a non-negotiable item for firms in order for them to remain competitive. As a result, firms are gearing up to explore new AI-driven tools across multiple functions — from legal research, writing, and matter management to back-office functions such as pricing, billing, and predictive analytics. In addition to the considerable capital investments, as well as the costs of maintenance and training, firms may also need to spend sizeable sums to optimize and maintain their data in order to capitalize on the potential benefits of GenAI.

While the timing of widespread GenAI adoption may be an open question, there is little doubt that it will occur and that the impact on both the practice of law and the business of law will be significant, if not transformative.

It will be critical for firm leaders to strategize how they will plan to evaluate, implement, and fund these technologies. And they will likely need flexibility — depending on how quickly the technologies are introduced and adopted by the market — as well as ability of those technologies to enable firms to establish competitive advantages. Here again, the key word is opportunities. GenAI brings opportunities for many law firms to improve efficiency and identify avenues for new growth.

Opportunities vs. uncertainties

At the same time, however, uncertainties abound. As mentioned previously, the path and timing of GenAI adoption is a wild card, and economic uncertainty is growing as we head further into 2025. Firms will need to weigh their needs — both current and anticipated — and balance those against potential scenarios.

Firms certainly can’t control market demand, but they can, to a large degree, manage their expenses. And whether they view expenses as strictly a cost rather than the costs of opportunity will largely dictate their expense strategy. The uncertainty about the future may cloud visibility into the opportunities that lie ahead, but there will be opportunities nonetheless — even if the exact extent, specifics, and timing of those opportunities are unclear.

Capitalizing on strength

Indeed, the level of profit growth seen in 2024 puts firms in as strong a position as ever to invest in the future. Conversely, waiting to invest in hopes of preserving current cash flow could risk putting off needed investments until a market downturn occurs, at which time the costs would be even more painful.

Nevertheless, due to firms’ short-term capital structures, internal investment hurdles will be challenging. Initiating conversations and securing buy-in from key partners is essential, and those discussions should begin now.

With December’s data showing that many firms doubled down in the final month of the year with a surge of overhead spending, it may be that many firm leaders have come to the same conclusion: Never miss a good opportunity to improve your long-term prospects and competitiveness.

Leonard Lee, of Perfectense, contributed to this blog post