Why clients are moving legal work downstream at warp speed with AI

Law firms saw demand surge in 2025 at a rate not seen in the industry for more than a decade, with billable hours increasing by 2.5% on the year and reaching growth as high as 4.4% in July. But beneath these record-breaking numbers, there are subtle changes that are changing how and where corporate clients purchase legal services.

Data from Thomson Reuters’ recently published State of the U.S. Legal Market report examines why the growing price gap is driving one of the most significant market shifts in decades.

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The widening tariff gap creates a tipping point

Shifts in demand reveal client priorities

Elite companies double down on premium jobs

Medium-sized companies take advantage of market opportunities

What this means for the legal market

The widening tariff gap creates a tipping point

When Am Law 100 attorneys cross the $1,000 per hour threshold while other attorneys average around $600, general counsel (GCs) start to make different choices. Nearly 90% of GCs report that resource constraints prevent them from achieving the level of strategic impact their organizations expect, forcing greater scrutiny of external counsel spending.

For many in-house legal departments managing fixed or declining budgets, outsourcing routine matters – and even quite complex work – to law firms that in many cases charge 40% less has become standard practice rather than the exception.

Shifts in demand reveal client priorities

The data provides a clear picture of the development of legal work. Mid-sized firms surged with demand growth of nearly 5% in the second half of the year while the Am Law 100 fell short of the 2% mark, resulting in the largest percentage point-spread gap in demand between the top and bottom segments since the global financial crisis.

Clients actually spent less time per hour on legal services in 2025 than in 2024, despite firms increasing rates by 7.3%, indicating that rate increases are pushing work downstream. One consequence of these technology and price dynamics is the acceleration of “mobile demand,” the movement of legal work from the most expensive Am Law 100 firms to cheaper alternative firms. A company’s legal department doesn’t just take care of routine matters. They are rethinking which engagements truly require elite counsel and which can be handled effectively through more affordable options.

Elite companies double down on premium jobs

Rather than competing on price, the top firms concentrate on the very premium, high-risk items for which clients have no choice but to pay top dollar. Complex transactions, corporate betting litigation, and special regulations – especially private equity transactions – determine the rates that justify premiums.

The average law firm saw profit growth of 13% by 2025, with Am Law 100 firms seeing exceptional results as profits per attorney increased by 53.7% since 2019. This strategic repositioning allows elite firms to maintain profitability even as they lose market share on routine matters.

Medium-sized companies take advantage of market opportunities

Firms outside the Am Law 100 are increasing their wages at the same or faster pace than larger competitors despite significant losses in rates, indicating that traditional market hierarchies are shifting. Mid-sized and second-tier companies are getting jobs that would have been automatically given to large companies a decade ago.

Since January 2023, the average Am Law Second Hundred firm has experienced headcount growth of nearly 8% and mid-sized firms by more than 6%, while Am Law 100 firms have experienced slower growth at 3%. Many of these companies are also leveraging technology to narrow capability gaps with larger competitors, making them attractive alternatives for cost-conscious clients.

What this means for the legal market

The $1,000 cap represents more than just a pricing milestone. This marks a fundamental change in client behavior and market structure. The rise in mobile demand is creating winners and losers in the legal market.

For law firms, success now depends on clear positioning. Elite companies must justify premium pricing through genuine expertise and results. Mid-sized companies must demonstrate that they can deliver advanced work efficiently. And all firms must recognize that clients now view advisor decisions from the outside through a value lens rather than defaulting to brand prestige.

“Tectonic forces” in the legal industry are creating fundamental tensions that will continue to reshape the market in 2026 and beyond. Companies that adapt to this new reality will thrive. Those who think the old hierarchy is permanent may be on the wrong side of history.

The US State Legal Market Report from Thomson Reuters provides comprehensive data on demand trends, price dynamics and profitability across all company segments. Download the full report to make informed decisions about your legal spending strategy.

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2026 Report on the State of the US Legal Market: Peaks of prosperity and fault lines below

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