Some Clients See Law Firm Spend Drop, Just As AI Embeds

A new survey of inhouse lawyers has found several key facts: that AI is now widely used within corporate legal teams; internal legal headcount is still increasing for many companies; and that 26% expect to cut spending on law firms in 2026. The use of alternative fee arrangements (AFAs) has also increased.

Those four things combined in the CLOC and Harbor survey for 2025 paint a potentially transformative picture for law firms:

• 26% said they expected decreased spending on law firms in 2026, this is as hourly rates continue to grow at a rapid pace, and while the demands on corporates to obtain legal and regulatory support only ever seems to rise. I.e. overall demand for legal services seems likely to grow, law firms are putting up their prices in anticipation of that growing demand, and yet around a quarter of inhouse teams are saying they may spend less on external advisers.
• Plenty of lawyers are still going inhouse and although expectations of more hires to teams have dropped slightly – 32% from 42% expecting to grow headcount – about a third of companies are still growing the number of lawyers they employ.
• AI is now very much part of inhouse life, with most indicating a serious engagement with the technology – ‘85% of departments have a dedicated resource or special committee managing AI initiatives’ – and with general productivity (74%) seen as the main overall benefit. I.e. a number of inhouse teams are both using AI and still adding headcount, or using AI and keeping headcount the same. The net result is more work done internally.
• And the use of AFAs seems to be steadily growing. This does not mean those AFAs are all fixed fees, as the term covers a very broad definition that includes success fees, value billing, and other methods. But, generally this shows clients are becoming more open to going past the hour, just as AI takes root.

Overall, and on face value, this paints a classic narrative of clients relying less on law firms, with AI very much in the mix. But….it’s not so simple.

Law firms are, broadly, doing incredibly well. Demand is very high overall and despite many clients not wanting to publicly support hourly rate rises, they appear to generally accept the increasing asking prices – even if there are some markdowns and write-offs.

This seems to be a paradox. How can clients be keeping more legal spending inhouse, using AI more, hiring more staff, but still enabling the major law firms to make more money than ever before?

One possible answer is that the higher value work is still going to law firms and they in turn have never charged so much for it. So, it’s likely correct that many inhouse teams are keeping more within the business, but as legal demand rises overall, and as the rates external advisers demand go ever higher, when it comes to higher risk work the law firms still do really well.

One other thought here is that rising hourly rates could perhaps be seen as not just opportunism, or responding to inflation, but also a signal that as more basic work gets ‘AI-ed’ away, that law firms are pushing up their prices for when they are really needed. The net result: both buyers and sellers are super-busy, there is more AI…but, the law firms still do amazingly well on medium to high complexity matters that corporates continue to feel they have to send out for a variety of reasons: from risk handling, to lack of specialised knowledge.

In short, although there are some important signals here, the broad structural picture of Big Law is not yet one of disruption. But……these indicators could transform into something else in the next few years.

We shall see……

P.S. no mention here of NewMods….but they will certainly feature more in the future.