Significant shifts in law firm market, including generative AI, pose challenges: 2024 report on the state of the US legal market by Thomoson Reuters

• Law firms adapting to new market realities are separating themselves from their competition
• Positive market results in 2023 are expected to continue in 2024
• Generative AI could impact nearly all aspects of law firm operations

Thomson Reuters, a global content and technology company, and the Center on Ethics and the Legal Profession at Georgetown Law today released the 2024 Report on the State of the US Legal Market. The report notes fundamental shifts in the market threaten to upend traditional law firm business models, even as the law firm market experienced “an encouraging but not outstanding year” in 2023. Additionally, the rapid emergence of generative AI threatens to add further complexities for law firms and their clients.

While the legal market strengthened in 2023 with demand, rates, productivity, and expenses improving, the report notes that how law firms are achieving success is shifting. The report calls this a “sorting out” process, where firms are testing different strategies and levels of action. As a result, certain firms – those most willing to embrace new market realities and adapt to a changing legal market – and market sectors are performing significantly better than others.

Shifting market factors include:

• Legal work continues to move down-market towards smaller firms as clients seek greater efficiency and better value-to-cost balance.
• Clients are increasingly enforcing budget caps and Outside Counsel Guidelines (OCGs) to reduce costs.
• Transactional practices, which fueled much of the legal market’s growth in recent years, have seen demand slowing in favor of counter-cyclical practices. Transactional practices include corporate work such as M&A, as well as real estate and tax. Counter-cyclical practices, such as litigation, bankruptcy, and labor & employment, tend to perform better in difficult economic conditions. Demand for litigation, in particular, was up 3.2% through the end of November, reaching a 15-year high.
• Rapidly rising rates are being offset by lower realization and higher expenses, challenging profitability, although expense growth is slowing.

The report concludes that the more successful law firms are those that adjust to the new market realities faster than their competitors. While acknowledging the challenges and difficulties of change, the report states that continued success will require “an openness to new ways of thinking about structuring the delivery of legal services in a market that no longer rewards many of the traditional ways of doing things.”

“Significant changes in the legal market have been under way since 2007, but many of these effects were masked by the strong demand for transactional services during the decade from 2011 through 2019, a period marked by sustained low interest rates that encouraged commercial activity,” said James W. Jones, a senior fellow at the Center on Ethics and the Legal Profession at Georgetown Law and the report’s lead author. “The challenge facing law firm leaders in today’s more volatile market is that many of these changes are now accelerating and may require fundamental changes to how legal work is conducted, how legal services are delivered, and how law firms conduct their business operations.”

“Firms that are consistently high performers share the ability to both read the market astutely and change their practices, rates, and operations to suit the shifting market,” said Paul Fischer, president of Legal Professionals, Thomson Reuters. “Challenges are rising as demand and client expectations change, but these also present opportunities to increase competitiveness and gain market share. We are finding there are different strategies firms can employ, including rate and staffing strategies, that can lead to successful results. The common thread is a willingness to adapt and the leaders who can meet these challenges will best position their firms for future success.”

The outlook for 2024 is positive, as corporate work is expected to rebound slightly. Among corporate general counsel, 40% expect to increase outside legal spend, while only 18% expect it to decrease. At the same time, direct expenses continue to be a burden on firms’ bottom lines. Although attorney salary scales have stabilized following intense competition for talent in 2021 and 2022, the normalization of associate salaries may be short-lived, and another round of sizable salary increases may be in the offing in 2024.

One of the biggest potential changes facing the legal market is generative AI. The report notes that while law firms have used AI for a long time, rapidly evolving generative AI and large language model tools could have a massive impact on lawyer headcount, law firm service delivery, pricing, and many other aspects of their operations. The report cites the Thomson Reuters Future of Professionals Report, which found that the potential impact of generative AI on the legal profession is viewed by law firm leaders with a mix of optimism and caution. In particular, a significant number of legal professionals expressed optimism about AI’s ability to enhance productivity and efficiency, and to free up time for higher-level tasks.

The 2024 Report on the State of the US Legal Market expands that analysis and lays out three hypothetical scenarios of the impact generative AI could have on law firms.

• It significantly enhances both client value and law firm profits by increasing efficiency and reducing costs for firms, and enabling higher-quality advice, faster service, and more creative solutions.
• Clients derive a disproportionate share of the benefits of generative AI by getting greater leverage in competitive pricing and an increased ability to bring work in-house.
• Generative AI finds utility in law firm areas such as knowledge management and search, as well as operations, marketing, IT and HR, but does not significantly alter current legal practices or firm-client relationships.

The report notes that most law firms are already working towards the first scenario, although it cautions that the impacts of generative AI are still in early stages. The report emphasizes that firm leaders need to understand that the evolution of generative AI will happen with or without their participation.

Download the 2024 Report on the State of the US Legal Market here.