Three years ago, a blockbuster report from Goldman Sachs predicted that nearly half of legal tasks could soon be automated by artificial intelligence—news that sent a collective chill down the legal industry’s spine. While Goldman pulled back its estimate last fall, the perception persists that AI could soon demolish law firm businesses.
Just last year, in fact, in its 2025 survey on the state of the legal market, Thomson Reuters found that 44% of firm leaders predicted that generative AI would “result in a decline in the use of billable hours pricing models over the next five years.”
What a difference a year can make. In 2026, the market appears to be sending a very different message about law firm services and hourly billing. If anything, the biggest threat AI has posed to law firms has been the expenses they face when adopting and implementing artificial intelligence tools.
When it comes to the legal work itself, many corporate law firms are currently seeing a rare surge in demand that is driving double-digit revenue growth. “With billable hours surging even as firms adopt AI, the industry is not seeing the technology eat into demand,” Bloomberg recently wrote.
- AI was expected to cut billable hours. Instead, large law firms are posting some of their strongest growth in decades, with revenue up nearly 12% and billable hours rising more than 4% in the first half of 2026.
- Record M&A activity is fueling demand, including 47 deals worth more than $10 billion and a 48% jump in total deal value to $2.8 trillion, creating sustained work across technology, healthcare and industrial sectors.
- For law firm leaders, the bigger challenge is cost pressure. AI investment, attorney compensation and real estate expenses are climbing quickly, especially for midsize firms competing for scale and talent.
- The article explains why fears about AI replacing legal work have not materialized yet and why client pressure on billing models could still reshape the industry in 2027.
Big Jump in Inventory: Law Firm Revenue Hits 11.7%
In its half-year review of law firm financial performance, Citi recently said that revenue among the firms it surveyed grew nearly 12% during the first half of the year. Prepared by the bank’s law firm advisory services group, the report showed billable hours were up more than 4% over the first half of 2025. That rate of growth is a rarity for the legal industry. In most years, demand growth averages 1.5% to 2%, Citi said.
The demand picture is even brighter among the largest firms. According to The American Lawyer, Citi’s data showed that law firm hours and fee inventory jumped 20% among firms in the Am Law 50 and nearly 17% among firms of all sizes. (Inventory refers to pending revenue.)
That kind of increase in inventory “bodes well for the rest of the year,” the magazine wrote. And “early indications suggest demand continues to be strong in the third quarter as well,” Daniel Greenfield, a director in Citi’s law firm advisory group, told Bloomberg.
Revenue also rose faster at mega firms. While firms overall saw an 11.7% uptick, Am Law 50 players posted a 13.1% increase over the first half of last year, Citi said. Demand growth was also highest at those firms, up 4.6%.
But the growth is not limited to the biggest firms, The American Lawyer reported. Among firms in the rest of the Am Law 100, Citi showed that demand rose 3.6%. And firms ranked in the Am Law Second Hundred saw a 3.9% bump. Again, both of those numbers are well ahead of historical averages for demand growth. “It’s rare we see above 3.5% demand growth,” Greenfield said in an interview with The American Lawyer.
Hot Deals and HALOs: What's Driving Record M&A Activity
The spikes in revenues and inventory are being driven, in large part, by record levels of transactional activity. In the first half of the year, 47 deals valued at more than $10 billion were announced. Deal value rose 48% over last year to $2.8 trillion overall, the highest level since 1980, Reuters reported in July.
Technology companies were doing the biggest deals in the first half, Reuters reported. And as expected, AI-related deals were plentiful. But concern over AI’s potential impact is driving activity as well. Tech deals were just “one half of the equation, particularly in the U.S.,” Sam Newhouse, global vice chair of Latham & Watkins' M&A and private equity practice, told Reuters.
Newhouse said deals involving large industrial and infrastructure companies, so-called HALOs, are driving the market as well. HALO stands for heavy assets, low obsolescence— essentially companies that are unlikely to be affected by AI. Investments in those players are seen as a hedge should the AI bubble burst. And those types of deals “will continue no matter what impact AI has," Newhouse said in his interview with Reuters.
Law firms, of course, win either way. And Citi noted that firms are not only profiting because of a surge in big deals, but from a busy middle market as well. Citi’s Greenfield told The American Lawyer that the firms the bank surveyed were seeking “deals of all sizes and the industrials, healthcare and technology sectors, have been catalysts.” Litigation remains active as well, although “large-cap and middle-market deal strength are the primary story,” Greenfield said in the interview.
Firms are being assisted by billing rate increases, as well. Law.com reported that firms are continuing to benefit from “aggressive billing increases throughout 2026.” The website cited a Thomson Reuters report that “worked rates,” the actual rates clients agree to pay, jumped 7.1% in the second quarter.
Soaring Expenses: AI Spending Is Outpacing Every Other Cost
Unfortunately for firms, stronger revenues may not translate into a parallel rise in profits. “If anything can disrupt their performance leading into 2027, it’s the expense burden being turbocharged by AI investment and increasing attorney compensation,” Law.com wrote in August.
Citi said law firm expenses increased by 9.7% during the first half of 2026. And in a survey of Am Law 100 firms released in August, Law.com said nearly 70% of firms reported AI and innovation investments were up by more than 5% through the second quarter of 2026. “In particular, AI and innovation investments are rising faster than any other expense category,” the Law.com report said.
Greenfield of Citi concurred, telling Bloomberg that “firms continue to expect that spend to accelerate…It seems modest in terms of a percentage of revenue, but it is growing among the industry and fast.”
Citi, in an earlier report, said the firms it surveyed spent about one-quarter of 1% of their revenues on AI last year. That includes spending more on tools and on professional staff to help build out their AI capabilities, Bloomberg reported. Though a small proportion of revenues, the AI spend is “more than double what it was in 2024,” Greenfield told The American Lawyer.
Other, bigger-ticket expenses are rising as well. Real estate costs are increasing as firms demand more in-office time from lawyers and staff. And more than half of the firms in the Law.com survey said attorney compensation had risen by 5% or more during the second quarter. Overall, “expenses increased across the board at most firms," the report found.
The View From Mid-Law: Squeezed by AI and Compensation Costs
The strain is showing up first outside the Am Law 50. Midsize and regional firms "can find themselves squeezed from both sides," according to Kristin Stark, a consultant at Fairfax Associates, who told Law360 Pulse that while most Am Law 200 firms—including midsize players—started 2026 strong, many are also under real pressure heading into the back half of the year.
That pressure is already reshaping the mid-market through M&A rather than organic growth. About 18 mergers involving Mid-Law firms were announced in the first half of 2026 alone, including the combination of "super midmarket" firm Spencer Fane with the 75-attorney Conner & Winters—exactly the kind of scale-seeking deal Citi's Greenfield predicted would define the segment. As one midsize firm leader put it to Law.com, this tier of the market "most need[s] the added heft" to compete on both AI investment and compensation with larger rivals.
What Happens in 2027: Law Firm Consolidation and AI Bill Comes Due
In December, Citi posited that law firms would face three major challenges in 2026:
- An “uncertain and volatile” business environment.
- Generative AI, including how to implement it and how to gauge its impact on leverage and billing models.
- The ongoing war for talent and continuing lateral movement.
Citi said that “firms will face continued challenges around the rising cost of running a law firm and pricing pressure. And the challenges of modest demand growth and rising costs will likely drive continued consolidation.”
2026 has not quite worked out that way. Law firm mergers were down in the first half of the year, and the surge in client demand may be giving firms more breathing space and capital to fund and implement AI tools.
Barring an unforeseen economic calamity, megadeals are likely to continue. Reuters reported in July that “some dealmakers are so bullish” that they believe M&A activity this year may outstrip the post-pandemic transactional boom of 2021. That should keep large law firms, in particular, operating with strong revenue growth and high inventory in the months to come.
But the market for smaller deals may be less frothy. The co-head of global M&A at Bank of America told Reuters that the appetite for smaller transactions may ebb, reflecting “a growing view that a $1 billion to $3 billion deal takes just as much time as a larger one, so when an opportunity for a big transaction arises, companies see this as the moment to act." The consolidation wave Citi predicted in December might also develop as those firms look for scale to help them implement AI tools and to compete on compensation.
A Changing Picture? Why the Billable Hour Isn't Safe Yet.
As yet, the legal industry has avoided an AI-triggered Armageddon. And from a financial perspective, 2026 is likely to end as strongly as it began—at least for large firms. Citi’s Greenfield told Bloomberg, “We anticipate it is going to be a strong year for the industry despite the expense pressures.”
The early claims of job losses and the death of the billable hour may have been overwrought. Then again, a slowdown in demand, a leap forward in AI capability, and most critically, pushback from clients could change the picture again in 2027. As Anthropic general counsel Jeff Bleich said in March, “I don't think the billable hour is the solution, and we've known it for a long time.” That sentiment is hardly uncommon among clients. For law firms, the real test of their business model may come when clients have both the incentive and leverage to press the case.
FAQ
Is AI reducing law firm billable hours? No—not yet. Billable hours actually rose 4.2% industry-wide in the first half of 2026, well above the historical average of 1.5% to 2%, according to Citi's law firm advisory group.
Why did law firm revenue grow so much in 2026? Record levels of M&A activity. Deal value rose 48% over the prior year to $2.8 trillion—the highest level since 1980—driven largely by technology deals and so-called "HALO" transactions (heavy assets, low obsolescence) in industrials and infrastructure.
How much are law firms spending on AI? Firms surveyed by Citi spent roughly a quarter of one percent (0.25%) of revenue on AI last year—a small share of the total, but more than double what firms spent in 2024, and expected to keep accelerating.
Are law firm expenses rising faster than revenue? Expenses are rising fast—up 9.7% in the first half of 2026—driven by AI investment, higher attorney compensation, and increased real estate costs. So far, revenue growth has outpaced that increase, but Citi warns expense pressure could threaten performance heading into 2027.
Which law firms are growing fastest? The largest firms are seeing the biggest gains. Am Law 50 firms posted 13.1% revenue growth and 4.6% demand growth in the first half of 2026—both outpacing the industry average.
Are mid-size and regional law firms seeing the same growth as large firms? Not entirely. While many Am Law 200 firms started 2026 strong, midsize and regional firms face added pressure from rising AI and compensation costs without the scale of the largest firms—a dynamic already driving mid-market mergers, like the 2026 combination of Spencer Fane and Conner & Winters.
Will the billable hour model survive AI? It's an open question. While demand hasn't collapsed in 2026, some clients—including Anthropic's general counsel—have publicly questioned whether the billable hour is the right long-term pricing model, and a slowdown in demand or shift in AI capability could change the picture in 2027.
---
David L. Brown is a legal affairs writer and consultant, who has served as head of editorial at ALM Media, editor-in-chief of The National Law Journal and Legal Times, and executive editor of The American Lawyer. He consults on thought leadership strategy and creates in-depth content for legal industry clients and works closely with Best Law Firms as senior content consultant.