Affordability crisis? Not for law firms. Client demand spiked during the third quarter of 2025, providing firms with one of the best periods of growth in the 21st century, new data shows.
In its Q3 2025 Law Firm Financial Index, Thomson Reuters found that client demand was up nearly 4% over the same period in 2024. This was the fourth-highest quarter for client demand in the past two decades, according to Thomson.
Furthermore, the other periods of high demand growth all occurred in 2021 as the legal industry recovered from the severe downturn triggered by the COVID-19 pandemic. At the time, demand surged as businesses returned to normal operations. Thomson emphasized that the Q3 2025 increase was of a different nature.
“Q3 2025 reflects sustained and robust client activity, signifying genuine expansion beyond merely returning to a baseline pre-pandemic level,” Thomson said.
‘Very Healthy’ Growth
The sunny outlook was seconded in another third-quarter report, this one from Citi’s Global Wealth at Work Law Firm Group. Citi said that demand for the Am Law 200’s services had risen nearly 2% over the first nine months of the year, with revenue up 11% and inventory approaching 13% growth.
“All told, 2025 has been ‘very healthy’ on the financial front and continues to get better,” wrote Law.com, quoting Citi’s head of advisory services.
Firms started the year in a far different place. In its 2025 Legal Outlook Survey, released in January, Best Law Firms found that 80% of lawyers believed that demand for legal services would either increase only slightly or stay the same as 2024. “This cautious optimism reflects confidence in the industry’s resilience,” the survey noted, “coupled with pragmatism about potential economic and market factors.”
Concerns multiplied after the Trump administration took office, imposing new tariffs, laying off government workers, and attacking major law firms perceived as opposing the president’s agenda. Indeed, in the second quarter, Thomson reported that demand was up just 1.6% and productivity was declining.
Now, however, “as firms move into the fourth quarter, the question is no longer whether 2025 will be profitable, but rather just how profitable,” Thomson said.
A Transactional Bump
What drove the third-quarter surge in demand? Thomson said transactional practices—particularly those at midsize firms—were key.
Overall, demand for transactional work was up 4.7% over the same quarter in 2024. Midsize firms outstripped the overall rate with a 6.1% increase. That compares to a 4.3% rise at Am Law 100 firms and a 3.5% bump at Am Law Second Hundred firms. (The Am Law Second Hundred includes firms ranked between No. 101 and No. 200 on the Am Law 200 survey of the highest-grossing law firms in the United States.)
“Among transactional practices, M&A work led the charge and was supported by robust activity in general corporate, real estate, and tax,” Thomson said. “As such, every transactional practice was intensely busy across all segments.”
Citi also noted that firms with strategic mergers and acquisitions were doing well. Despite tariffs and international trade issues clouding the picture at the beginning of the year, “we have started to see acceleration in midmarket M&A activity,” Citi told Law.com, adding that “there’s still a lot of room for that to pick up as well."
Counter-Cyclical Increases
Citi also noted a healthy increase in bankruptcy and restructuring, real estate, and infrastructure practices. Thomson, too, saw healthy growth in counter-cyclical practices (areas like bankruptcy and litigation that tend to rise when economic conditions deteriorate).
Thomson reported 4.1% growth in counter-cyclical demand, led by a 6.3% surge at Am Law Second Hundred firms and a nearly 4% increase at midsize firms. Thomson noted that counter-cyclical practice growth “was more concentrated among the Am Law Second Hundred and Midsize firms, with the Am Law 100 struggling to perform at the same level.” Am Law 100 firms saw a 1.6% increase in counter-cyclical demand.
Rates may be the deciding factor pushing counter-cyclical work from Big Law to regional and midsize firms, Thomson said. The results for the third quarter indicated that demand for counter-cyclical practices is “seeing increasing mobility in the market, with corporate clients (especially the largest) seeking savings by moving some of their work to firms that charge lower rates,” according to Thomson.
This, in turn, is helping “these legal buyers maintain their budgets despite soaring hourly rates from their outside law firms and their own expanding legal needs,” Thomson wrote.
Rates and Revenues
While growth in demand is powering 2025 revenues, so, too, are rate increases. Worked rates—the prices firms actually charged their clients—were up 7.4% in the third quarter, Thomson said.
The jump in rates mirrored record increases reported in the second quarter, Law.com noted. A senior data analyst for Thomson told the website that “rate growth continuing to hold at really, really high levels, [is] allowing firms to push revenue to an unprecedented degree.”
Combined with demand, rate increases allowed firms to post a 6.6% year-over-year increase in revenue per lawyer during Q3, Thomson said, and all indications are that firms are on track for double-digit profit growth in 2025. “The tectonic pressure driving firms upward in Q3 2025 has yielded impressive results,” Thomson said in its report.
Citi has not issued a profit prediction for the year, citing the potential vagaries of the end-of-the-year collections cycle. The bank’s advisory chief told Law.com that while she believed some firms will report double-digit profit growth, “my hunch would be mid-to-high single-digit growth.”
Collections Questions
While most of the financial news in the third quarter was positive, law firms do face questions about how much they will be able to collect from clients by year’s end. Citi said clients have been slower to pay bills as the year has progressed, telling Law.com that the collections cycle had increased 1.1% by the of June and 1.2% at the end of September.
The issue is hitting large firms the hardest, with Citi saying that Am Law 50 firms were driving much of the increase in the collections timeline. At those firms, the collections cycle has grown by 2.3%, Law.com reported, adding that “for those firms, some of that market volatility at the start of the year put deal work, and payments for that work, on pause.”
The emphasis on transactional work is partially responsible for the collections slowdown, Citi told Law.com. Litigation can be billed every month, but firms usually bill for transactional work after they have completed their assignments, the bank said. Slow e-billing systems and favorable interest rates that may prompt clients to hold onto their cash are also factors, a Citi analyst said in an interview with the website.
In August, The American Lawyer wrote that law firms across the spectrum “are losing between 15% and 25% of their total potential revenue to inconsistent and informal collections practices.” Industry sources told the magazine that revenue leakage is occurring “at every step of the billing process” with firms losing “substantial revenue to improper timekeeping, self-imposed discounts, late payment from clients and more.”
Rising Expenses
Rising expenses are also eating into profits. Headcount rose 3.2% year-over-year for law firms, with much of the increase occurring at Am Law Second Hundred and midsize law firms, according to Thomson.
Since Q1 2023, in fact, headcount at Am Law Second Hundred firms has risen nearly 8%, Thomson reported, and more than 6% at midsize firms. Am Law 100 firms have seen slower growth, up 3% during the same period. “The Am Law 100 remains more reserved, consistent with its emphasis on raising rates instead of hours worked,” Thomson said.
For its part, Citi said to Law.com that overall expenses had grown 9.1% by the end of the third quarter, driven by a nearly 3% jump in headcount for the legal industry and “increased compensation expense pressure.”
According to Thomson, overhead expenses at firms have risen nearly 5% so far in 2025. Artificial intelligence investments are likely one of the primary culprits. Legal technology and knowledge management spending “have skyrocketed,” Thomson said. Spending on knowledge management is up by nearly 12% year-over-year, Thomson said, and legal technology expenses have risen 11.2%.
While Q3 was the best of times for law firm finances, rapid expense growth and continuing economic uncertainty could make for a rocky 2026, Thomson warned. “The lesson remains: Demand can disappear overnight, but expenses rarely do,” Thomson wrote. “While firms are eagerly capturing as much of the upside activity as they can, the downside risk still looms large.”
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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.
