Big Law Demand Rises as M&A Revival Boosts Revenue Despite Surging AI Cost

 

Law firms recorded 11.7% revenue growth in the first half of the year, driven by an unusually strong increase in demand, according to data from Citi’s Law Firm Advisory Group.

 

Law firms across the industry recorded 4.2% growth in billable hours compared with the same period last year, Citi’s Law Firm Advisory Group found. Such a level of demand growth is rarely seen in the legal industry. Citi said the long-term average for demand growth is between 1.5% and 2%.

 

A surge in transactional work, covering both mega-deals and middle-market M&A matters, drove the increase, according to Citi. Law firm leaders have been waiting for a broad-based M&A recovery, and the latest figures suggest it is gaining momentum just as firms face rising costs from the ongoing battle for talent and the race to adopt artificial intelligence.

 

Expenses are rising even as lawyers work longer hours. Some of the increase is being driven by higher headcount. Income partners, one of the most expensive groups of lawyers for firms, are also the fastest-growing cohort, said Daniel Greenfield, a director in Citi’s Law Firm Advisory Group.

 

Total expenses rose 9.7% compared with the same period a year earlier, Citi found. Compensation expenses increased by 8.9%, while overhead expenses rose 10.5%.

 

The 50 largest firms by revenue performed slightly better than the industry as a whole, although their expenses also increased at a faster pace.

 

Revenue at those firms rose 13.1%, while expenses increased by 10.7%. Larger firms recorded particularly strong growth in overhead expenses, which rose 12.6%.

 

Law firms are also spending more on artificial intelligence, including hiring highly skilled professional staff to develop and expand their AI capabilities, Greenfield said. At the end of last year, firms were spending 0.25% of their total revenue on AI, according to a separate Citi survey.

 

“Firms continue to expect that spend to accelerate,” Greenfield said. “It seems modest in terms of a percentage of revenue, but it is growing across the industry and fast.”

 

Despite the increase in AI adoption, the rise in billable hours suggests the technology is not yet reducing demand for legal services, Greenfield said.

 

Law firms are entering the second half of the year in a strong position. Bills awaiting collection, a measure known as inventory, rose 16.7% during the first half, Greenfield said.

 

“We anticipate it is going to be a strong year for the industry despite the expense pressures,” he said. “Early indications suggest demand continues to be strong in the third quarter as well.”

 
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