Like the witches in Wicked, law firms appear to be defying gravity. Amid 2025’s economic uncertainty, firms are showing steady growth and stable profits so far this year.
That’s according to the latest Law Firm Financial Index by Thomson Reuters Financial Institute. Thomson reported that firms in the second quarter calmly responded to the “tumultuous geopolitical and economic backdrop” and were “unexpectedly prosperous” given the economic conditions.
But Dorothy’s proverbial house may still drop on the legal services market this year. According to Citi, much of the stronger-than-expected growth in the first few months of 2025 was tied to a backlog of inventory and delayed client payments from 2024. Expense growth outpaced demand, and productivity has declined this year—although at a slower rate in Q2 than in Q1, according to Thomson.
Meanwhile, law firms are responding by shifting their focus to practices like litigation that tend to do well during economic downturns. They are also shoring up compensation packages for top rainmakers to ensure they continue to help bolster the bottom line.
An Increase in Demand
Demand for legal services was up 1.6% in the second quarter, according to the LFFI. While lower than the growth rate in the same period in 2024, “it’s much higher than firms would have been expected to achieve on economic fundamentals alone,” Thomson said.
Firms have also slammed the brakes on declines in productivity. While the number of hours each lawyer worked was down, the decline of 1.3% was, according to Thomson, far less than in the first quarter. And firms are doing better at generating fees. The report showed that lawyers are delivering an average of 6.3% more in fees over the same period last year.
They will need the extra cash. Firms of all sizes are seeing significant increases in overhead costs, Thomson said, and among Am Law 100 firms, costs have risen an average of 8.1% during the last year. That’s despite efforts by large firms to rein in headcount growth.
Artificial intelligence may be a key factor in rapidly rising costs. Firms are investing in knowledge management and technology to respond to the rise of AI. And as generative AI tools become more common at law firms, many are now “locked into a high-stakes arms race,” Thomson said.
A Drab Deal Market
While generally positive about the state of firm finances midyear, the LFFI report includes a note of caution. “Under normal circumstances, it would be perfectly reasonable for firm leadership to start celebrating,” Thomson reported. “In truth, however, the mood is far less optimistic.”
Indeed, much of the growth activity appears to be the result of countercyclical practices—such as litigation, bankruptcy, and labor and employment, Thomson said. And Am Law 100 firms are performing less well than their midsize and Am Law Second Hundred counterparts. Those firms were responsible for “driving overall growth” in the second quarter and were “outperforming the traditionally dominant Am Law 100,” Thomson said. Am Law 100 firms, it added, “faced slowdowns in several practice areas.”
One of the reasons for the Am Law 100’s underperformance is the rocky deal market. Deal volume dropped by 9% during the first half of 2025, and according to a PwC Pulse Survey in May, some 30% of companies said they had paused or revisited deals. The downward trend is expected to continue in the months ahead.
“We continue to see transactions in companies with a local focus within national borders or others less susceptible to tariffs,” PwC said in a mid-year analysis of the global M&A market. “Great companies with strong cash flow and healthy prospects in any territory or sector are still being bought and sold. However, the market has not been kind to the many companies falling outside these parameters.”
Recalibrating Rainmaker Pay
As they grapple with economic uncertainty and technological transformation, the largest firms are also attempting to preserve their ability to attract and retain top talent. Several Global 100 firms are recalibrating their pay scales for rainmakers to make the highest-performing talent’s income more certain and predictable, Law.com reported.
This has meant creating new partnership tiers or adding shares or points to compensation packages to ensure that rainmakers see the benefit of higher profits in their base pay.
As one consultant who focuses on law firm pay told the website, a number of top partners have grown their books of business over the last few years from $20 million-$30 million to $60 million-$100 million. Yet their base pay was often capped, making them dependent on less-predictable bonuses to reward consistently high levels of performance.
Moving more of their compensation to base pay will also relieve pressure on bonus pools. A few rainmakers were taking—appropriately—the lion’s share of bonus dollars, making it difficult to reward others when they delivered better-than-expected results.
At Latham & Watkins, for instance, the firm changed its points systems to add two new tiers to reward its highest-performing partners, Law.com reported. The elite partners in these categories are now guaranteed higher base pay, and the firm was able to set aside additional points to better fund its bonus pool, allowing more partners to participate.
The changes in pay come as the largest law firms “are increasingly seeking to pay $20 million or more to their highest-performing partners,” Law.com said.
Talent Hunt in Texas
The hunt for high-performing talent is pushing some law firms into expansion mode, as well. That’s particularly true in regions like Texas, where out-of-state firms continue pushing into the market and local firms look beyond the state’s borders to sustain growth.
The state’s four largest corporate firms—Baker Botts, Haynes Boone, Bracewell, and Vinson & Elkins—the number of lawyers practicing outside Texas has grown from 30% in 2011 to 46% last year, Texas Lawbook reported. The pool of talent available in markets like Dallas and Houston is only so large, which means Texas firms must drive revenue elsewhere, one law firm hiring consultant told Texas Lawbook.
The cost of talent has also become more expensive in Texas, driven by the boom in the legal work in the market during the last several years and increasing competition from firms based outside the state. According to Texas Lawyer, attorney headcount at the 100-largest law offices in the state grew by 2.3% last year. Much of the increase was from out-of-state firms with Texas offices.
Among the out-of-state firms, New York-based Paul Hastings saw the highest growth rate, with 165% more lawyers than the previous year, according to Texas Lawyer. While the firm has had a Houston office since 2012, in the last year it added a second office in Dallas, hired an eight-partner group of finance lawyers from Vinson & Elkins, and brought aboard three lateral partners from Akin Gump Strauss Hauer & Feld. Overall, the firm’s headcount in Texas spiked from 23 to 61 lawyers, Texas Lawyer reported.
Overall, the largest law firms headquartered in Texas saw a 35% revenue increase during the first quarter of 2025, Texas Lawbook reported, citing data collected by Citi.
Defamation Cases Boost Boutiques
While uncertainty in Washington is roiling markets and creating headaches for Am Law 100 firm leaders, some boutique litigation firms are finding gold in the political turmoil.
Litigation boutiques are guiding "some of the largest defamation cases against major media organizations and a wide range of other defendants," Bloomberg reported. "The litigators say they are best positioned to mitigate political and professional conflict.”
Among the firms Bloomberg cited was Brito PLLC, a four-lawyer, Coral Gables, Fla. firm known for its commercial litigation and franchise law practices. The firm was hired by President Trump to sue the Wall Street Journal over its reporting on his alleged ties to convicted sex offender Jeffery Epstein.
Alexandria, Va.-based boutique Clare Locke, Bloomberg reported, has been hired by Emanuel Macron and his wife for a defamation case against right-wing podcaster Candace Owens and by United Healthcare to fight online criticism of the company in the wake of the murder of its CEO. And Susman Godfrey, Bloomberg noted, has been basking in the glow of a $787 million settlement in 2024 on behalf of Dominion Voting Systems, which sued Fox News for false allegations made in the wake of the 2020 election.
The boom in high-profile defamation cases is particularly beneficial for litigation boutiques because they are able to offer contingency-based fee structures. Defamation cases are high-risk, and plaintiffs are more willing to take the gamble if they know they only have to pay if they win. As one Susman partner told Bloomberg, boutiques can give plaintiffs an honest answer about whether their cases have a chance. “If it’s a dog of a case,” he said, “they’re not going to take it.”
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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, creates in-depth content for legal industry clients, and works closely with Best Law Firms, as senior content consultant.
