This appears to be the best of times for law firms, financially at least. Firms are “coming off what appears to be a windfall year for the legal industry,” Law.com recently reported. While deal work usually increases in good economic times and litigation work expands when times are bad, demand for both has been surging. “Mega-deals are the new normal,” one Big Law dealmaker told Law.com.
Even so, firms face some existential questions about their businesses. First among them: Is artificial intelligence about to eat their lunch? The AI bubble lifting the overall economy may burst. At the same time, major clients appear to be making significant progress in using artificial intelligence tools to reduce time and money spent on routine legal work.
Meanwhile, many firms have been investing record sums on new talent and technology upgrades. And they’ve continued to pursue significant rate increases to fund these endeavors, a fact that has not been lost on their clients. If the AI boom does end, the deal market dries up and corporate law departments reduce their reliance on outside counsel, law firms could be left with a nightmare scenario—a dramatic decline in billables at the moment when their expenses have peaked.
Irrational Exuberance?
Not everyone buys that artificial intelligence has spurred a financial bubble. The CEO of chip-making giant Nvidia recently told shareholders, “There’s been a lot of talk about an AI bubble. From our vantage point we see something very different," NPR reported. But to many analysts and even some of technology giants, the AI boom more than meets the definition of “irrational exuberance,” the phrase coined by former Federal Reserve Chairman Alan Greenspan in 1996 to describe the dot-com bubble. In Greenspan’s definition, stock prices for dot coms had an “inverse relationship exhibited by price/earnings ratios and the rate of inflation.” The same appears true for AI.
Google’s chief executive said AI investment is currently showing “elements of irrationality,” in a November interview with the BBC.
NPR quoted Paul Kedrosky, a venture capitalist and research fellow at MIT's Institute for the Digital Economy, who noted the enormous amount of capital “pouring into a ‘revolution’ that remains mostly speculative.” Said Kedrosky, "The notion that the revolution continues with the same drum beat playing for the next five years is sadly mistaken."
One key problem is the science. Yann LeCun, one of the world’s leading experts on artificial intelligence and former chief AI scientist at Facebook-owner Meta, posited in an interview with The New York Times that the technology industry will eventually hit a dead end in A.I. development. The issue, he said, is that the large language models used in AI technology “can get only so powerful.”
Because they are “trained solely on digital data,” L.L.M.s have no way of “understanding difficulties in the real world,” and have “no way to plan ahead,” LeCun told the Times. “L.L.M.s are not a path to superintelligence or even human-level intelligence,” LeCun said. “The entire industry has been L.L.M.-pilled.”
Unrealistic Expectations
Nonetheless, businesses have poured resources into AI. “As irrational enthusiasm and unrealistic expectations start to grow, financial and physical resources are sucked into AI,” the chief economic analyst for UBS Global Wealth Management wrote in a recent article for the World Economic Forum.
But the financial rewards aren’t yet accruing for many of the businesses that have spent heavily. As NPR reported, “a growing body of research indicates most firms are not seeing chatbots affect their bottom lines.”
And for the companies fueling the boom and driving the deal market that is lifting law firm revenues, market valuations are completely divorced from actual revenues. Among the research NPR cited was a recent study by the investment firm Menlo Ventures found that only about 3% of users are paying for premium AI services. This is “a strikingly low conversion rate and one of the largest and fastest-emerging monetization gaps in recent consumer tech history,” the firm said.
MIT economist and 2024 Nobel laureate Daron Acemoglu added in the same NPR report, "these models are being hyped up, and we're investing more than we should."
Firms Follow Suit
Law firms, of course, have not been immune to the AI investment boom—and they are experiencing many of the same ups and downs as their counterparts in the wider business community.
In its most recent survey of law firms on the state of the legal market, Thomson Reuters reported that the average firm’s technology budget rose 9.7% in 2025 and knowledge management increased 10.5%. The last year has seen “the most rapid real growth in these expense categories likely ever experienced,” Thomson said.
The legal tech industry has also seen a surge in outside investment to fund AI products aimed at law firms and corporate law departments. Law.com reported in September that over the past 14 months, five legal tech companies raked in investments of $100 million or more. “Leaders in legal tech said these sky-high investments present an inflection point in the legal tech market, with nine-figure funding rounds likely to continue as the market for AI-powered legal tech expands,” the website said.
Yet some law firms are struggling to see the return on investment promised by AI. As one recent legal technology survey noted, law firms may have even entered a “trough of disillusionment” around artificial intelligence. This is common in technology adoption when inflated expectations and initial excitement run into the realities of a technology’s limitations. On the positive side, this may push more firms to begin demanding proof that AI tools will actually transform their businesses before greenlighting major technology investments.
The problem is that many firms are already well down the road. “Firms are spending like the current revenue conditions represent a permanent shift rather than a temporary spike,” the Thomson Reuters Institute said in its 2026 Report on the State of the Legal Market, published jointly with the Center on Ethics and the Legal Profession at Georgetown Law.
If the Bubble Bursts
The Thomson report delivers a stark warning for firms. Law firm are in the midst of a surge of AI investment that has “sparked speculation about a potential AI bubble,” Thomson said. As a result, firms may need to alter their strategies to avoid being caught short.
“If a sharp correction in the broader economy—like the AI bubble bursting—would occur, it would greatly strain client budgets, forcing organizations to cut costs and scrutinize their outside legal spending,” the Thomson report said. “As budgets tighten, clients will seek better value at lower price points, intensifying competition among firms and pushing outside lawyers to justify every dollar of their rates.”
Thomson noted that profits per lawyer are up by 8.4% over pre-pandemic levels and fees charged per lawyer have climbed by nearly 17%. The growth is being driven by increasing prices rather than “operational improvements,” Thomson said.
“Some analysts argue that record-high rates could signal efficiency gains [driven by AI] — if lawyers accomplish in one hour what previously took them 10, then the value delivered may justify the price,” Thomson said. “However, a $2,000-per-hour associate rate during a downturn could create sticker shock that could push clients toward lower-cost firms or in-house solutions.”
A Power Shift
Indeed, clients are already noticing. A 2025 Association of Corporate Counsel survey found that 59% of companies said they “have seen no clear savings yet” from outside counsel who use AI. And among those who have seen positive results, the ACC said, “the most common savings are related to efficiency gains rather than direct cost reductions.”
The lack of clear communication from firms around their AI efforts has created a “transparency gap” that “threatens to stall progress and obscure opportunities for efficiency and cost savings,” the ACC said.
“A power shift” is underway, “with GCs capturing the upper hand,” Above the Law reported about a Harbor Law Department Survey, conducted in conjunction with the Corporate Legal Operations Consortium (CLOC).
Nearly two-thirds of the 135 legal departments surveyed reported “intentionally bringing more work inside over the past two years,” the survey results showed. This “just so happens to coincide with the two years where the conversation around AI leapt from nerdy diversion to magic productivity box,” the website said.
Some 85 percent of the law departments in the survey said they were dedicating resources to managing AI initiatives. “As AI transfers more leverage to clients, law departments are negotiating more budget projection-friendly alternative fee arrangements,” Above the Law said.
Strategic Questions
If client budgets tighten in the wake of an AI bubble bursting, “those law firms leaning on rate increases rather than operational improvements will be the first to feel the pain,” Thomson notes in its report.
Preparing for this possibility and for the shifting power dynamics between firms and clients means asking strategic questions about the firm’s AI investments. Among them:
- Does AI investment deliver measurable improvements for clients?
- Does charging premium rates after adopting AI result in added value clients can actually see?
- Is a firm being transparent with clients and ready to answer questions about efficiency and AI pricing and outcomes?
To weather a potential downturn, law firms should, as Thomson puts it, “align their technology with client needs, demonstrate tangible benefits, and maintain transparency to preserve trust in an increasingly competitive market.”
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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.
