Legal Tech Spending Surges 9.7% as Firms Race to Adopt AI

Law firm technology spending grew 9.7% in 2025—the fastest real growth likely ever experienced in the legal industry—as firms accelerate investments in generative AI capabilities, according to the newly released 2026 Report on the State of the US Legal Market from Thomson Reuters and Georgetown Law's Center on Ethics and the Legal Profession. Knowledge management tools saw even steeper growth at 10.5%, signaling that firms are betting heavily on AI-enhanced workflows to drive competitive advantage.

The investment is paying off for firms with clear strategies: law firms with a formal AI strategy are 3.9 times more likely to experience critical benefits compared to those without significant AI adoption plans. Combined with 8.2% growth in talent costs and a 53.7% increase in profits per lawyer for Am Law 100 firms since 2019, the legal industry is experiencing what the report calls "tectonic forces" reshaping how legal work gets done.

Adoption Has Moved Past Experimentation

The spending surge reflects a fundamental shift: AI is no longer experimental in legal practice. According to the Clio Legal Trends Report, 79% of legal professionals are now using AI tools in 2025—up dramatically from just 19% in 2023. The American Bar Association's 2024 Legal Technology Survey reports that 30% of private law firms have adopted AI technology, nearly triple the 11% adoption rate in 2023. Among larger firms with 100+ attorneys, that figure rises to 46%.

The adoption curve is particularly steep among smaller practices. Smokeball's 2025 State of Law Report found that generative AI adoption among small firms and solo practitioners nearly doubled in a single year—rising from 27% in 2023 to 53% in 2024. Among mid-sized firms, Clio reports that 93% are now using AI in some capacity.

Why This Matters Now

The technology spending surge represents a seven-percentage-point jump above core inflation—making it the most significant investment acceleration since at least the global financial crisis of 2007. But this isn't the incremental tech adoption of previous decades.

"The tech revolution this time around isn't the gentle cycle that law firms experienced when online research replaced sprawling legal libraries or when email supplanted fax machines," the report states. "Such changes streamlined workflows but left the fundamental practice of law untouched. Now, the use of advanced AI-driven technology like generative AI represents something different: A technology that can draft briefs, analyze contracts, and synthesize case law in ways that can actually alter how legal work gets done."

Elite firms are responding with significant training investments. Latham & Watkins ran an "AI Academy" for over 400 first-year associates, signaling that AI proficiency is becoming essential for younger lawyers entering the profession.

For personal injury and mass tort firms, this shift has practical implications. AI-powered services can now process medical records, identify treatment patterns, and cross-reference case documentation in hours rather than weeks—the same efficiency transformation happening across legal practice areas.

The Billing Model Crisis

Despite record technology investments, the report identifies a fundamental disconnect: 90% of legal dollars still flow through standard hourly rate arrangements. This creates what the report calls "an almost absurd tension" where firms deploy technology that accomplishes work in minutes that once took hours, then try to bill for it by the hour.

"The math doesn't work unless firms can negotiate rate increases steep enough to offset the efficiency gains," the report notes. "However, clients aren't eager to see all their productivity benefits flow straight to law firm profits."

Corporate Legal Departments Leading Adoption

Making matters more challenging for law firms: corporate legal departments have led law firms in gen AI adoption since its introduction in 2022. When general counsel see their own teams using AI to handle routine work at a fraction of traditional costs, they increasingly question why outside counsel charging premium hourly rates are not delivering similar efficiencies.

A Business Insider report found that 14% of in-house counsel reported savings in external legal spend after integrating AI systems for contract review, compliance checks, and document drafting. Nearly 90% of GCs report that resource limitations are preventing them from delivering strategic impact, forcing intense scrutiny over external counsel spending. This "client value squeeze" is accelerating the push for firms to demonstrate measurable AI-driven value.

Mobile Demand: Midsized Firms Gain Ground

One consequence of these dynamics is accelerating "mobile demand"—the movement of legal work from the most expensive Am Law 100 firms to less costly alternatives. Midsized firms captured nearly 5% demand growth in the latter half of 2025, while the Am Law 100 struggled to crack 2%—the largest gap between segments since the Global Financial Crisis.

"With the average Am Law 100 lawyer's standard rates cracking the $1,000 barrier in 2025—while everyone else averaged around $600—the math became irrefutable," the report observes. General counsel needed to do more legal work with the same budgets, and shifting matters to firms charging 40% less provided necessary breathing room.

For midsized and plaintiff-side firms, this shift presents both opportunity and challenge. Technology investments that enable smaller practices to deliver sophisticated work previously reserved for elite firms could accelerate the redistribution—but only if those firms adopt AI tools at pace with larger competitors.

Technology as Talent Multiplier

Rather than using AI to reduce headcount—as many industries have done—law firms are taking the opposite approach. Lawyer full-time equivalent (FTE) growth remained strong at 2.9% in 2025, marking the third consecutive year of historically robust hiring. Compensation for lawyers rose 8.2% year-over-year—broad-based across levels, not just for top partners.

The logic: if AI augmentation makes lawyers more efficient and valuable, firms believe this only increases the worth of their human capital. Firms are using AI to handle routine document review, research synthesis, and medical record analysis, freeing attorneys to focus on strategy, client relationships, and courtroom advocacy.

The efficiency gains are measurable. A LegalOn Technologies survey found that legal teams spend 2-4 hours per contract on review. For a team reviewing 500 contracts annually, that equates to approximately 188 working days devoted to contract review alone—a workload where AI has clear leverage.

For personal injury practices handling complex medical cases, this means AI-powered services—including automated medical record retrieval and analysis—can process the documentation groundwork while attorneys focus on case strategy and client communication.

What This Means for 2026

The Path Forward

The report suggests that law firms face a critical strategic choice: invest heavily in AI capabilities now, or risk losing market position to competitors and alternative providers who do. The 9.7% spending growth indicates most firms have chosen investment—but the 3.9× benefit gap between firms with and without formal AI strategies suggests that simply spending more is not enough.

A significant challenge remains integration. According to an Allrize survey, only 2.4% of firms report seamless integration of core tools like Microsoft suite with their AI additions. Many firms are doing patchwork upgrades rather than wholesale modernization—potentially limiting the ROI on their technology investments.

Success requires intentional deployment, clear workflows, and integration of AI tools into core practice operations. For litigation practices, that means evaluating AI-powered solutions across the case lifecycle—from medical record retrieval and analysis to document review and case preparation.

The Bottom Line

The legal industry is in the midst of its most significant technology transformation since the digitization of legal research. With 9.7% spending growth, 79% AI adoption among legal professionals, and a clear performance gap between AI-adopting and non-adopting firms, the market is sending an unambiguous signal: AI investment is no longer optional.

For law firms—particularly plaintiff-side practices building complex medical cases—the question is no longer whether to adopt AI tools, but how quickly they can deploy solutions that match the efficiency gains their corporate counterparts are already achieving.

Sources: 2026 Report on the State of the US Legal Market (Thomson Reuters/Georgetown Law), Clio Legal Trends Report 2025, ABA Legal Technology Survey 2024, Smokeball 2025 State of Law Report, LegalOn Technologies Survey, Business Insider.

This article provides general information about legal technology trends and should not be construed as legal or business advice. Consult with qualified professionals for advice specific to your situation.