Rising Expenses, AI Investments Offset Strong Demand and Billing Rate Growth for US Law Firms in 2026 First Quarter

Strong demand and higher billing rates failed to translate into major financial gains for US law firms in the first quarter of 2026, according to new figures released on Wednesday.

Rising expenses — including growing investments in artificial intelligence — along with falling productivity, cut into what could otherwise have been a highly profitable quarter, according to the latest Law Firm Financial Index released by the Thomson Reuters Institute. Thomson Reuters Institute and Reuters share the same parent company.

The “average” financial picture for law firms in the first quarter suggests that 2026 may not replicate the notable gains recorded in 2025, said Bryce Engelland, senior industry data analyst at the Thomson Reuters Institute. However, he noted that it is still too early to predict how the remainder of the year will unfold.

Geopolitical tensions, including the war in Iran, have also emerged as a factor. While global instability has historically boosted demand for legal services, particularly in areas such as restructuring and dispute resolution, that trend has not yet materialised this year.

According to the index, mergers and acquisitions pipelines slowed in March as dealmakers waited for greater clarity, while the restructuring activity that typically rises during periods of economic disruption failed to emerge.

The report noted that it remains unclear whether the impact of the conflict is temporary or indicative of a deeper structural shift, making the second quarter a key period to watch.

The index compiles quarterly financial data from 195 large and mid-sized US law firms, covering indicators such as demand, productivity, billing rates and expenses.

Demand for legal services rose by an average of 2.7 per cent year-on-year — an unusually sharp increase. Demand for M&A work climbed 4.4 per cent compared with the first quarter of 2025, while both litigation and overall corporate work increased by 2.9 per cent.

Law firms also continued to raise billing rates following last year’s strong increases. Billing rates among the top 100 US firms by revenue, as ranked by American Lawyer, rose by 9.8 per cent. Mid-sized firms recorded a more moderate annual increase of 5.3 per cent.

However, rising costs across the sector tempered those gains. Direct expenses increased by 8.1 per cent year-on-year, while overhead expenses rose by 8.3 per cent, the index found. Much of the increase in overhead spending was linked to investments in technology, particularly artificial intelligence.

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