As trade wars and growing geopolitical uncertainties continue to mount, law firms are again staring down the barrel of a recession, and to determine how it may impact their industry, the best place to look may be the past
While the global financial crisis (GFC) that began in 2007-‘08 was of the most significant financial meltdowns in the history of the United States, its impact on the large law firm industry is often recounted in much more than in terms of business or data. Much like the fall of a grand empire, the GFC marked the end of an era for large law firms, with its onset bringing about a seismic shift that forever altered the landscape of the legal industry.
The crisis left behind a legal industry that, despite being rebuilt, was never quite as grand — at least, according to one popular narrative.
This historical context may explain why the legal industry is becoming increasingly jittery as the likelihood of another major recession seems to be rising with alarming regularity. As of the start of 2025, the US economy is again looking a little bit shaky. The ongoing fluctuations in the global trade war have rattled markets, destabilized industries, and significantly lowered economic expectations for late-2025 and 2026. Indeed, the recent Q1 2025 Law Firm Financial Index from the Thomson Reuters Institute, showed that law firms have a slate of challenges ahead, all of which may prove difficult to navigate.
Already, firms sailed into 2025 with some difficulties ahead of them, such as high baselines from the stellar year of 2024 that set a high bar for comparisons to this year and an expected moderation of US economic growth. All this resulted in our financial models having lower expectations for performance in the first quarter of 2025. Yet, average law firm demand growth overperformed expectations in Q1, and perhaps far more tellingly, law firms enacted their largest rate increase ever, which clients took with little complaint.
Further, collection realization against agreed-upon rates, or how much law firms collect from clients compared to the rate that firms originally negotiated, actually improved compared to that of Q1 2024 and is now at one of its higher levels since the global financial crisis.
This may seem a little contradictory. On one hand, we’re looking at an economic recession and bringing to mind the last major economic downturn, pointing out how its disastrous impact became mythos among law firms. Yet, on the other hand, we’re saying that demand and rates are looking far better than one may have expected.
So, what’s going on here? Well, we still might be experiencing a bit of a false high in which the industry is seeing short-term positive signs that could be entirely outweighed by approaching long-term negatives. In fact, the global financial crisis is a perfect example of the kind of scenarios that law firms could face.
The changing practice mix
From 2008-‘10, law firms averaged a quarterly year-over-year contraction in legal demand of more than 2%, plunging all the way to an 8% contraction in 2009. Even worse, most of that lost demand came from lucrative transactional practices. And even though litigation demand did perform better during the economic downturn, it was more a case of allowing law firms to hold on by their collective fingertips than actually compensating them for the overall shellacking other practices saw. It took law firms the better part of a decade to rebuild their transactional practices to their 2007 heights.
Perhaps even more impactful than the demand profile however is what happened to rates. Prior to the global financial crisis, law firms of all sizes were regularly able to raise rates by 6% or more, year over year. After the GFC, however, clients became far more resistant to such rate increases and far more sophisticated in managing their legal expenses.
Corporate general counsels — many of whom were law firm veterans let go during the worst parts of the crisis or highly skilled law school graduates turned away as firms closed the gates — proved to be far superior in the aftermath than their predecessors in controlling legal matters and costs from the corporate side. As a result, law firm rate growth slowed tremendously, and collection realization plummeted. The transactional decade that followed was really 10 years of rebuilding for law firms, which were seeking to recover the transactional demand that had been lost. Only by 2019 did firms find themselves secure enough to begin pushing the envelope with rate increases again.
In many ways, the GFC is the financial calamity that fits the near-mythical status attributed to it, at least so far as the financial data shows. Yet the latest data from the Q1 2025 LFFI report suggests that law firms have reversed all this as both rates and demand are up. So, what’s the concern?
Well, the problem is that this, too, is eerily similar to the GFC. While 2008 pushed firms to the brink, the prior year, 2007, was actually one of the most prosperous years on record, featuring demand and rate growth that remains some of the highest in recent history. It’s also important to remember that the GFC didn’t simply start the day Lehman Brothers collapsed in September 2008, but rather the markets experienced a nearly year-long lead-up that began in 2006 and especially hit hard in 2007. During this period, there was significant financial stress as more and more mortgages fell into default and other parts of the international economy felt the pressure. Not surprisingly, this lead-up period produced quite a bit of lucrative work for law firms from panic-stricken clients, but it was a short-term sugar rush.
With the odds of recession climbing, according to major institutions like the World Trade Organization and the International Monetary Fund as well as major banks such as JPMorgan Chase, Morgan Stanley, and Goldman Sach. There is every possibility that what law firms saw in Q1 is a similar sugar rush of demand.
While there is no certainty that a recession is coming, even if the odds are steadily rising, there is little indication so far that if a recession does occur, it will be on the same scale as the global financial crisis. The GFC was a vicious economic downturn, paled only in living memory by the Great Depression itself. What may end up mattering more than the depth of the recession or its longevity is how today’s law firm leaders address it and begin planning for it now. The steps they take, from hiring to spending, from expansion to pre-emptive discussions with clients, may be the best moves that can be made as the future becomes increasingly uncertain.
You can download a copy of the recent Q1 2025 Law Firm Financial Index from the Thomson Reuters Institute, here
