Law firms recorded 11.7% revenue growth in the first half of the year, powered by a rarely seen surge in demand, according to new data from Citi's law firm advisory group.
The industry saw billable hours grow 4.2% compared to the same period last year, well above the long-term average demand growth of between 1.5% and 2%. Surging transactional practices handling both megadeals and middle-market M&A matters drove the increase, Citi found.
Law firm leaders have been waiting for a broad-based M&A rebound. The Citi numbers show it is putting wind in their sails just as expenses mount from an ongoing talent battle and a race to adopt AI.
Rising costs accompany rising demand
The revenue growth is coming with a cost. Total expenses rose 9.7% from the year-ago period, with compensation expenses up 8.9% and overhead up 10.5%.
Income partners, a particularly expensive cohort, are the fastest growing group of lawyers at firms, said Daniel Greenfield, a director in Citi's law firm advisory group.
The 50 largest firms by revenue performed slightly better than the industry as a whole. Revenue there rose 13.1% while expenses grew 10.7%, with overhead expenses climbing 12.6%.
AI spending is picking up
Firms are spending more on artificial intelligence, including hiring highly skilled professional staff to build out their AI capabilities. At the end of last year, firms spent 0.25% of total revenue on AI, Citi said.
"Firms continue to expect that spend to accelerate," Greenfield said. "It seems modest in terms of a percentage of revenue, but it is growing among the industry and fast."
Despite the adoption of AI, billable hours are surging. The technology is not eating into demand, Greenfield said.
Strong second half expected
Firms are well positioned heading into the second half. Bills waiting to be collected, known in the industry as inventory, rose 16.7% in the first half.
"We anticipate it is going to be a strong year for the industry despite the expense pressures," Greenfield said. "Early indications suggest demand continues to be strong in the third quarter as well."
Why this matters for legal professionals
For lawyers and legal staff, this data carries a dual signal. Demand for legal services is at its strongest in years, M&A work is flowing again and rainmakers remain in high demand.
The headcount numbers show where firms are directing that new investment - toward income partners and AI-capable staff. Professionals with both billable capacity and AI proficiency will be in the strongest position as firms expand these costly teams into the second half.
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