A new Thomson Reuters Report reveals a fundamental disconnect between what law firms believe about AI and what clients may soon demand. This disconnect exposes an uncomfortable truth for firms: future legal work will require less time with fewer lawyers and, conceivably, less revenue. It creates a gap can’t be closed simply by raising rates and cutting expenses. Instead, it may require a different business model altogether.
The Thomson Reuters Report
The report is entitled 2026 Report on the State of the US Legal Market and was done in partnership with Georgetown Law Center on Ethics and the Legal Profession.
Thomson Reuters (TR) is a significant legal vendor and has invested heavily in GenAI tools. With many vendors, that often would mean looking at reports like this with some skepticism. But I have found the TR reports and analysis to usually be sound and well-reasoned. This one is no exception.
Some Key Facts
The TR statistics are revealing.
According to the data, “The average law firm celebrated 13.0% profit growth in 2025 [with] firms of all different shapes and sizes finding ways to capitalize on opportunities.” It’s the strongest demand growth in more than a decade. Work and revenue are pouring in.
As a result, firms are racing to capitalize by loading up on talent and technology. Technology spending is up nearly 10% and talent costs up 8.2% over 2024. Hourly rates have also increased dramatically.
Profits are also soaring and to be blunt, partners are sitting fat, dumb, and happy. According to the report, many have concluded that throwing money at technology and talent, raising rates, and watching the profits roll in is working out just fine. There’s no reason to change anything.
But there’s more to the story.
A New Sheriff in Town
There’s a new sheriff in town and it’s called AI. For harried GCs who need to reduce spend, AI may be the efficiency tool to do just that. If GenAI can reduce the lawyer’s time spent on a given task from 25 hours to 10, for example, that’s a real savings. Run that across all matters and you’re talking real money.
Here’s how TR puts it:
Now, the use of advanced AI-driven technology like generative AI (GenAI) represents something different: A technology that can draft briefs, analyze contracts, and synthesize case law in ways that can actually alter how legal work gets done. For an industry that’s operated essentially the same way since Langdell introduced the case method in the 1870s, this is uncharted territory.
Trouble on the Horizon
But TR offers some more facts that could spell trouble. First, “The surge in demand that’s lifting profits to record heights stems not from economic health but from chaos — trade wars, regulatory upheaval, and geopolitical tensions – all of which require constant legal navigation.”
But “firms are spending like the current revenue conditions represent a permanent shift rather than a temporary spike.”
And “many GCs are finding themselves squeezed, with stagnant budgets having to somehow withstand the increased weight of the moment.” Many GCs are signaling that big cuts may be ahead. As a result, TR predicts a significant correction may be in the offing.
Okay, we’ve seen this before. Think 2007 before the great recession. Or 2021 before the inflation tsunami. But this time there may be a more fundamental and long-lasting change.
The Response? Meh.
The law firm response? TR labels it “defensive.” Firms view the reduced hours now spent on matters due to AI as somehow being worth more since they will not contain more strategic analysis and less document drafting. So, the reasoning goes, they can just raise rates to make up the difference.
But, as TR succinctly describes, the rub is “clients may not agree, and firms aren’t yet making this case confidently.”
And it’s a hard case to make. Much of the 15 hours saved in our example was likely work of associates so the final 10 hours of a partner should have already been of strategic value.
Moreover, the billable hour model is based on time spent. The truth is it took less time by more than half. You can’t raise your rates so that you get the same amount of revenue when you didn’t work as much.
And, if you could just raise rates to make up the difference in revenue, the client gets no benefit from AI efficiency. Don’t think they are going to buy that.
The other problem is that the math doesn’t work. Let’s assume a lawyer bills $300 per hour. A brief takes 25 hours to write. If that lawyer does all the work, their bill for the brief would be $7,500. But with AI, the actual lawyer time to prepare the brief is now 10 hours. To generate the same amount of revenue, the lawyer would need to raise their rate to $750 an hour.
That’s more than double. Now run that across an entire firm and all matters and you can see the problem. Already budget-conscious clients at some point are going to draw the line and not approve rate increases, increases the firms say they need to maintain the same profit levels:
Clients aren’t eager to see all their productivity benefits flow straight to law firm profits. Nor are they prepared for the sticker shock of a $2,000 hourly bill from an associate, even if what they’ve accomplished in that time may have taken 10 hours to complete previously.
TR labels this an absurd tension: “a full 90% of all legal dollars still flow through standard hourly rate arrangements — the same billing structure that’s dominated since the 1950s. This creates an almost absurd tension that sees firms deploying technology that can accomplish in minutes what once took hours, then trying to bill for it by the hour.”
So, firms may simply not be able to generate the same amount of revenue.
And if TR is also right about a coming downturn in demand, that will further constrain law firms. They won’t be able to close the revenue gap with increased work. And don’t forget, AI is also enabling GCs to do more and more in-house.
Let’s Just Cut Costs
That leaves cutting expenses. Using AI to cut back-office expense helps some but it may not be enough to offset what could be a significant revenue loss.
And cutting associate expense, on the other hand, means fewer hours billed or even decreased quality. And long-term contracts and leases reduce other cost-cutting opportunities. Not to mention the fact that according to TR, firms have already spent more or less like drunken sailors on technology and talent thinking the present boom time will continue.
Certainly, there is reason to question whether GenAI will really make the impact many claim, as Melissa Rogozinski and I have written in our multipart series. But putting all the TR conclusions together suggests a perfect storm that leads inevitably to one conclusion: decreased profits and need for lawyers.
But there is a way out.
A New Reality
The above scenario, if correct, hinges on one thing: the continued wholesale reliance on the billable hour model. As long as revenue and profit depend on the number of hours billed, there’s no escaping the possibility that AI tools may reduce the time needed to be spent, billable hours, and correspondingly, profit and revenue.
And when that happens, partner draws are reduced. If you’ve ever sat through a partners meeting where it’s reported that results didn’t meet budget, you know hell hath no fury like what happens next.
But if you move away from a business model based on hours billed to one based on value provided, the matrix changes. A value-based system focuses on things like alternative billing models that incorporate notions of exposure and risk sharing in determining fees. Success-based fees and bonuses allow firms that bring true value to clients to be rewarded based not on time spent but on the value they provide.
Such a move requires a cultural shift that won’t be easy.
The Culture Shift
This kind of change will require a sea change in firm culture. That culture now rewards via compensation and advancement those who spend more time working a matter instead of less. A change to a value- and results-based model will be a tall order for law firms who equate hours billed with ability. It also means looking at profitability differently.
TR puts it this way: “[It] means modernizing pricing models that no longer match how legal work is done, strengthening client trust in an environment in which legal buyers are increasingly selective, and deploying technology in ways that deliver measurable value rather than marketing gloss.”
None of that will be easy. It has to start with firms taking a long hard look at reports like those provided by TR and recognizing some tough realities. It means changing how they have done things since the 1950s and the only system they know.
It means shifting from a model that’s brought unfathomable riches. It may mean some economic hits and reduced expectations that are uncomfortable. Perhaps hardest it means changing law firm culture from top to bottom.
But for those who plan and work hard to shift, it may mean survival.
Stephen Embry is a lawyer, speaker, blogger, and writer. He publishes TechLaw Crossroads, a blog devoted to the examination of the tension between technology, the law, and the practice of law.