Robert Ambrogi Blog
In their annual report on the state of the U.S. legal market, Thomson Reuters and the Center on Ethics and the Legal Profession at Georgetown Law say that 2024 was a pivotal year for law firms, marking the beginning of the end for the traditional law firm business model and perhaps also of the billable hour.
“It appears the proverbial genie is out of the bottle, with the changes to the world of large law firms set to only accelerate if anything,” says the report, which concludes that 2024 was “the year in which the pressures of change in law firm economics and structure have become inescapable.”
During 2024, law firms demonstrated robust financial performance, with average profits per lawyer growing 8.3% and profits per equity partner increasing by 11.6%, the report says.
But firms achieved these results only by undertaking significant structural changes to their business models, including modifications to partnership structures and compensation systems. Driving firms to make these adaptations was the growing impact of generative artificial intelligence on legal services delivery.
“Most law firms finished 2024 with strong profits per equity partner, continuing their performance from 2023,” the report says. “In many cases, however, that achievement was possible only because of fundamental changes in the economic and compensation models of the firms themselves — changes that would have been hard to imagine a few short years ago.”
Rapidly Evolving Market
Demand for legal services grew by 2.6% in 2024, marking the strongest genuine growth since before the 2008 financial crisis. This growth was notably broad-based, spanning both transactional and counter-cyclical practices, with litigation growing 3.3% and corporate practices rebounding from previous declines.
Billing rates continued their upward trajectory, increasing by 6.5% despite weakening inflation, representing the fastest pace of growth since the global financial crisis. The report indicates that client pushback on rates remained minimal, with realization rates holding steady amid increasing demand.
“The successes of 2024 should not, however, be understood to be reasons to stand firm,” the report cautions. “Indeed, even as law firms enjoy strong financial tailwinds, the market in which they operate is evolving rapidly.”
The report identifies several significant structural shifts in law firm composition, including a continued trend toward two-tier partnership structures. The proportion of non-equity partners has increased from 14.3% in 2005-2009 to 19.1% in 2020-2024, while equity partners decreased from 31.2% to 27.8% during the same period.
Technology spending emerged as a critical focus area, with firms increasing their technology investments at historically high rates even as inflation receded. The report warns about the challenge of “technological debt,” where firms might be tempted to patch older systems rather than make necessary investments in modernization.
Death of the Billable Hour?
The report is particularly critical of law firms’ historic adherence to the billable hour.
“Despite the well-documented faults in this method of billing, from its overreliance on inputs rather than outputs, its inflexibility and its increasingly obsolete nature in regard to the rise of technology-driven automation, the billable hour has remained a fixture of firms for over
half a century.”
That is likely to change, the report says, thanks to the development and adoption of gen AI.
“Although still in the early stages, the rapid growth of AI technologies promises to improve efficiency in the performance of legal tasks quite dramatically,” the report says. “… In such circumstances, it is hard to imagine that clients will not insist on being charged less for the
services performed, at least if the value of such services continues to be measured on an inputs basis.”
The report cites Formal Opinion 512, the American Bar Association’s first ethics opinion on gen AI, issued last July, which cautioned that lawyers who benefit from the efficiencies created by AI and who bill at an hourly rate should bill only for their actual time.
“As the use of GenAI tools continues to expand, … it is becoming increasingly obvious that the legal profession must rethink how it defines value when pricing legal services,” the report says. “Continued reliance on an inputs-driven model is simply not viable in the long term.”
What Lies Ahead
Looking ahead to 2025, the report projects that demand growth will likely weaken compared to 2024, though not to the low levels seen in late 2022 and 2023. Expense growth is expected to remain at historically elevated levels, particularly due to ongoing implementation costs of GenAI technologies.
The report concludes that while changes to traditional law firm models may be necessary, particularly regarding the billable hour model as GenAI adoption increases, firms have demonstrated remarkable resilience and adaptability in navigating recent challenges.
“In 2024 we saw firms taking steps to ensure their continuing success in a changing market, even though their actions required fundamental changes in their traditional models,” the report concludes.
“Going forward, it is quite likely that even more fundamental changes will be needed as a result of the rapid spread of GenAI technology and the transformative effects it is likely to have on the underlying economic assumptions that have guided law firms over the past 50 years.”