Report Highlights Law Firms' Strategic Adjustments Amidst Economic Landscape

 

Expenditure Trends

 
The executive report indicates a 6.1% increase in direct expenses and a 7% surge in overhead expenses during the third quarter compared to the same period in 2022. This data suggests a strategic effort by law firms to navigate financial challenges and position themselves advantageously in the face of economic uncertainties.
 

• To understand the broader forces shaping law firms’ strategic decisions today, it’s useful to compare findings from 2025 legal market trends and challenges, which detail how AI, compensation shifts, and firm structure are being reshaped in response to economic pressures.

 
 

Hiring Dynamics

 
The aftermath of escalating expenses is reflected in a noticeable decline in first-year associate hiring. Among the top 100 most profitable firms in the U.S., commonly referred to as the Am Law 100, first-year hiring witnessed a significant drop of almost 17% compared to the average of the preceding two September. AM Law 200 firms also scaled back, recording their smallest fall associate class since 2020, with hiring down approximately 25% compared to the last two years' average. Midsize firms were cautious, with a 9% decrease in first-year associate hiring over the same period.
 

• While firms are tightening hiring budgets, insights from law firm recruitment trends in 2025 show a rebound in lateral hiring and a shift toward targeted recruitment over volume-based models.

 

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Cost Management Strategies

 
The report suggests that conservative hiring practices, coupled with assertive rate strategies, are positively impacting the financial performance of law firms. In prepared remarks, industry experts highlight the effectiveness of such measures in fortifying both the top and bottom lines, setting the stage for a potentially robust conclusion to 2023.
 

• This report’s findings are part of a larger arc described in the future of law firms in a changing industry, which predicts that firms will need to sharpen focus on niche expertise, geography, and client segments in coming years.

 
 

Service Demand and Practice Areas

 
Demand for law firm services exhibited a third consecutive quarter of growth, rising by 0.1% in the third quarter. Notable expansion was observed in practice areas related to bankruptcy, litigation, regulatory, labor & employment, and intellectual property. Conversely, corporate (-1.5%), real estate (-4.8%), and mergers and acquisitions (-5.2%) practice areas experienced declines in growth.
 

• Firms are increasingly valuing lateral hires who can provide immediate value, which is echoed in this guide to attorney lateral movement exploring how attorneys are navigating practice-area transitions in the current market.

Strong Performers

 
The report underscores the resilience of counter-cyclical practices, showcasing better performance during economic downturns. Bankruptcy, litigation, and labor & employment emerged as robust practices, experiencing growth rates of 6.0%, 2.0%, and 1.1%, respectively. Regulatory and intellectual property also demonstrated positive trends, with 1.9% and 1.0% growth rates, respectively.
 

• Some firms that weather economic headwinds better than others tend to be those identified in highest-performing law firms and prestige rankings, where prestige, culture, and compensation interact to maintain resilience.

 
 

Market Outlook

 
The report highlighted a post-Great Recession high in quarterly rate growth, reaching 6.3%. While realization rates improved in the third quarter, halting six consecutive quarters of decline, billing and collection realization remained lower than in the third quarters of 2021 and 2022.
 

• Moreover, as hiring slows, retention becomes pivotal — and the drivers of attorney turnover and loyalty provide insight into what differentiates firms that retain top talent during economic stress.

 
Industry experts provide diverse perspectives on the market outlook, with varying performances among firms. Some anticipate 2023 to be a decent year, acknowledging a wide range in the average performance as some firms thrive while others face challenges.
 

• However, these strategies are not without consequences: recent research on work-life balance and compensation trade-offs suggests that increasing billing rates and conservative hiring can intensify pressures on associates and mid-level attorneys

 

Conclusion

 
The latest Institute of Legal Finance insights reveal a nuanced landscape within law firms, marked by strategic adjustments in response to economic dynamics. The moderation in expenditures, while persistently high, signals a deliberate effort by firms to navigate financial challenges and position themselves for potential opportunities. The cautious approach to first-year associate hiring among top-tier firms and the scaling back observed in Am Law 200 and midsize firms underscores a collective strategy to manage costs and enhance overall financial resilience.
 
The effectiveness of conservative hiring practices and assertive rate strategies is evident in the positive impact on law firms' top and bottom lines, setting the stage for a potentially robust conclusion to 2023. The growth in demand for legal services, particularly in counter-cyclical practice areas, reflects a dynamic market responding to evolving economic conditions.
 

• It’s instructive to look at the world’s largest law firms by revenue in 2025 to see which firms have scale advantages that allow them to better absorb economic shocks.

 
Looking ahead, the diverse performance among firms indicates a nuanced market outlook for 2023. While some anticipate a decent year, acknowledging the wide range in average performance, others face challenges in the ever-changing legal landscape. As law firms navigate these complexities, the strategic decisions made in response to expenditure trends and shifting practice area demands will likely play a pivotal role in determining their success in the coming months.

 

• Building resilience isn’t just for individuals — firms too must adjust strategically; lessons from building a resilient legal career after setbacks underscore the importance of belief, adaptability, and long-term strategy.

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