State of Legal Services: Challenges, trends, and outlook
The legal services industry in the United States is experiencing significant change driven by three key factors:
These changes present both challenges and opportunities for law firms, and each variable will influence firms’ strategies and operations in unique ways. With a focus on these factors, my article explores the current state of the industry, including challenges, emerging trends, and the current outlook for legal services in the U.S.
Revenue growth and corporate demand
Revenue growth in the legal services industry has been closely tied to economic performance and corporate demand. As businesses thrive, they seek legal guidance to navigate complex transactions such as mergers and acquisitions (M&A) and initial public offerings (IPOs). High corporate profits have fueled an increase in these activities, benefiting large law firms significantly. The complexity and stakes of these transactions have made professional legal services all the more vital, as firms can help ensure compliance and the smooth navigation of the always-changing regulatory environment. In turn, firms help boost revenue.
Intellectual property and litigation
The accelerated digitization of businesses has led to a significant rise in intellectual property (IP) and litigation revenue. With the growing importance of big data in business operations, there has been an increase in litigation related to cybersecurity and internet breaches. This surge in demand for specialized legal services has contributed to steady revenue growth, even during periods of economic downturn.
Consolidation and global reach
M&A involving international law firms has become increasingly prevalent as firms seek to expand their global reach and better serve multinational clients. Mergers present a cost-effective strategy for growth, allowing firms to increase their presence without the financial burden of opening new offices and hiring additional personnel abroad. However, rising interest rates have made it more expensive for law firms to merge, impacting the efficiency and revenue growth of the industry.
Technological advancements and the impact of AI
Law firms in the U.S. are increasingly investing in legal technology to enhance efficiency and optimize operations. Automation has transformed tasks like research, document drafting and contract analysis, allowing attorneys to focus on strategic activities. AI is further revolutionizing the industry by automating routine tasks with greater speed and accuracy, aiding in predictive analytics, and improving legal strategies. While these technologies reduce the cost of serving clients and deliver high value, they may also negatively impact future revenue for legal services. Law firms must implement a comprehensive AI strategy before adapting this tool for widespread use.
Countercyclical practices and volatility
The legal services industry is subject to volatility influenced by economic performance and financial markets. Countercyclical practices, such as bankruptcy and insolvency services, help mitigate revenue losses during economic downturns. When financial services underperform, these practices bolster revenue, reducing overall volatility. Additionally, regulatory changes can impact revenue volatility, with new laws driving demand for legal services and deregulation reducing it.
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Industry outlook: Challenges and growth opportunities
Economic recovery and consolidation
Despite challenges related to high inflation, rising interest rates and recessionary fears, the U.S. economy is expected to grow steadily. High GDP growth will boost corporate profits, increasing demand for commercial law services. As companies accumulate more cash, they will engage in more domestic mergers, viewing these transactions as efficient expansion strategies. By merging with established local firms, practices can enhance their reputation and presence in target markets.
Economic and political Uncertainty
Economic and political uncertainty will continue to influence the legal services industry. Recessionary fears, potential trade wars and changes in interest rates may discourage corporations from engaging in financial activities such as IPOs and M&A, reducing spending on legal services. Political shifts could also impact regulations, affecting the scope of legal services required. Additionally, government spending uncertainty further constrains the public sector’s demand for law firms.
Billing trends and technological integration
Billing schedules and competitive strategies are evolving, with law firms increasingly adopting alternative billing methods to attract clients. While these strategies can exert downward pressure on fees, technological integration helps offset revenue losses. Automation reduces billable hours and streamlines operations, enabling law firms to focus on more productive tasks and offer cost-efficient services. Despite lower revenue growth from shifting billing trends, technological progress benefits the industry overall.
Competition
The legal industry can expect increased competition from non-legal professionals, as some states have authorized non-attorneys with specific educational qualifications to advise and assist clients in certain areas of law. Despite this emerging trend, attorneys' unique education and expertise will remain indispensable for handling complex legal situations, ensuring continued demand for their services. Additionally, the proliferation of user-friendly online tools for drafting legal documents will lead to more affordable and generic legal solutions for common services, such as wills and employment agreements. While these digital tools offer cost-effective alternatives, smaller law firms will need to adapt and innovate to stay relevant and competitive in their respective markets.
Conclusion
The U.S. legal services industry is navigating a dynamic landscape marked by economic influences, technological advancements, and evolving client needs. Revenue growth is supported by corporate demand and intellectual property services, while consolidation activities and technological investments enhance efficiency. Countercyclical practices and regulatory changes contribute to revenue volatility, and economic and political uncertainties pose challenges. However, firms’ ability to adapt and innovate positions them for continued growth and success.
At Grant Thornton, we can support legal firms in their growth and profitability initiatives, helping them optimize their operations and financial performance in an increasingly competitive market. As law firms embrace AI and other technological advancements, they need to revise their operating models to be better equipped to meet client demands, navigate complexities, and thrive in an evolving legal landscape.
If you’re in the legal industry or another part of the services sector, drop me a message or an email ([email protected] ) and let’s talk about how I can support you and your organization’s goals.