Legal Tech Spending Surges 9.7% As Firms Race to Integrate AI, Says Report On State Of Legal Market

Law firms significantly increased their technology investments in 2025, with spending on tech and knowledge management tools rising by 9.7% and 10.5% respectively. According to the 2026 Report on the State of the US Legal Market, this surge is driven by a competitive race to deploy generative AI capabilities amid record demand growth. The findings highlight a critical juncture for the industry as firms attempt to reconcile transformative AI-driven efficiencies with traditional hourly billing structures.

The 2026 Report on the State of the US Legal Market from Thomson Reuters and Georgetown Law reveals that technology spending has jumped seven percentage points above core inflation, marking the most significant investment acceleration since at least 2007. This capital influx is primarily directed toward generative AI tools capable of drafting briefs, analyzing contracts, and synthesizing case law, representing a fundamental shift in legal practice rather than a mere workflow improvement. Firms that have implemented a formal AI strategy are reportedly 3.9 times more likely to realize critical benefits, prompting many to pair these tech investments with an 8.2% increase in talent costs to secure a competitive advantage.

Despite the rapid adoption of AI, a profound disconnect remains as 90% of legal fees continue to be processed through standard hourly rate arrangements. The report describes an 'almost absurd tension' where technology allows work to be completed in minutes that previously took hours, yet firms struggle to negotiate rate increases high enough to offset these efficiency gains. Corporate legal departments, which have often led law firms in AI adoption since 2022, are increasingly skeptical of premium hourly rates and are pressuring outside counsel to propose billing solutions that reflect AI-driven productivity.

These economic pressures are fueling 'mobile demand,' causing legal work to shift from expensive Am Law 100 firms to midsized alternatives. In the latter half of 2025, midsized firms saw demand growth of nearly 5% compared to just 2% for the Am Law 100, largely because their average rates of $600 provide a more sustainable option than the $1,000-plus rates of elite firms. Interestingly, rather than using AI to reduce staff, the legal industry is increasing its workforce; lawyer full-time equivalent growth rose 2.9% in 2025, with midsized and Am Law second-hundred firms growing their headcount by more than 8% since early 2023.