A Surprisingly Sunny Q2…But Are Darker Clouds Ahead?

The Thomson Reuters Institute’s Law Firm Financial Index Report (LFFI) delivered some good news for US law firms for the second quarter, rising four points to 55, indicating a stronger-than-expected quarter. Against a backdrop of economic uncertainty, political instability, and rising client anxiety, law firms found themselves increasingly in demand. Clients sought guidance on everything from regulatory risk to corporate governance, contributing to a healthy uptick in billing rates and overall demand.

However, the LFFI also reveals mounting pressure on collections, rising overhead, and slipping productivity all of which are issues that threaten to undermine the seemingly stable momentum.

Who’s Winning and Who’s Not

As with many economic trends, not everyone is benefiting equally. Law firms comprising the Am Law 100, a listing of the largest 100 law firms in the US, actually saw a slight, 0.6%, decrease in demand during Q2. Meanwhile, second-hundred and midsize firms thrived, with demand up 2.6% and 3.5%, respectively.

This shift may reflect a broader realignment in how clients approach legal spending. Faced with budget pressures and complex problems, clients may be leaning more heavily on firms that offer specialized expertise or better cost efficiency. That bodes well for regional and midsize firms, especially those with strong reputations in litigation or regulatory compliance.

Where Law Firms Are Putting Their Money

While firms are making money, they’re also spending it. Investment in technology infrastructure climbed by over 8% in Q2 on average year over year, and spending on knowledge management systems rose by more than 11%, according to the LFFI. The distinction between knowledge management and technological infrastructure is, perhaps, hard to discern, of course, as knowledge management is so heavily reliant on technological infrastructure.

However, as the LFFI notes: “These investments are increasingly seen as no longer optional, and are simply the cost of staying competitive in a shifting landscape.”

Practice Areas: Litigation Leads, IP Slips

Litigation remains a standout, with 2.0% growth in demand year over year. This isn’t too surprising: uncertain environments almost always result in more disputes.

Corporate work also saw modest growth (1.3%), and M&A activity edged up slightly (0.3%). Meanwhile, demand for intellectual property (IP) fell by 1.4%, perhaps reflecting cutbacks in patent filings or reduced investment in innovation as companies watched their bottom lines.

For law firms, this underscores the importance of diversification. Practices tied to economic expansion (like IP or M&A) may be more volatile, while litigation and regulatory compliance remain resilient regardless of economic cycles.

Rising Costs & Compromising Productivity

Even as billing rates rose, not everything is rosy. Productivity fell 1.3% in Q2 year over year. Another troubling trend: law firms are struggling to collect at a time when they would normally expect to see collections rise. This could signal broader cash flow issues for clients, especially those in distressed industries. Of note, billing delays and defaults hit smaller firms harder than larger ones with more cash reserves, and it could likely force some into cost-cutting or staff reductions if it continues into Q3 and Q4.

Looking Ahead

The legal industry continues to show strength, but not without vulnerabilities. Clients still need trusted advisors, of course, but as is the case with the larger culture, value and efficiency are of paramount concern. That’s why smart firms will take the lessons of Q2 to heart and begin positioning themselves for a shakier future.

Reviewing the LFFI, law firms should:

1. Watch Practice-Area Shifts: Stay close to industry trends.
2. Balance Tech Investments with ROI: Track usage and results closely.
3. Mind the Bottom Line: Invest in collections processes and client communication to speed up payment cycles.
4. Differentiate Smartly: Find your niche and own it.

©2025. DailyDAC™, LLC d/b/a/ Financial Poise™. This article is subject to the disclaimers found here.