Why an AI-Enabled Market Won’t Accept Rate Increases Much Longer

By Bríana McCrory, Chief Marketing & UK Revenue Officer, BigHand.

If you were the captain of a massive ocean liner, a relatively small chunk of ice breaking the surface of the ocean might seem insignificant. After all, your ship is strong, tested, and moving with such force. But icebergs, it turns out, carry most of their power underneath the surface. Just 10% of their mass is visible above the water. If you took the time to look, that small chunk of ice would reveal itself to be much more dangerous.

The legal industry faces a similar situation. Despite solid topline performance in 2025 and imminent rate increases, the financial foundations of major law firms are deteriorating.

BigHand’s 2026 Law Firm Finance Report: The Profitability Inflection Point reveals a widening gap between revenue growth and financial control. Rate increases may still flatter results in the short term, but they are increasingly being used to paper over structural weaknesses in how firms manage work, cash, pricing, and lawyer behavior.

In an environment shaped by AI-driven efficiency, client scrutiny, and margin pressure, that strategy is running out of road (or, to extend this metaphor further, clear waters).

The Hidden Erosion Beneath Rate Increases

Across the market, firms are reporting a steady erosion of underlying financial health.

• 89% report increased write-offs year-on-year, with 88% expecting further rises in 2026
• 90% report overall debtors have increased, with 87% expecting a further increase
• 26% now list cash-flow predictability as their top financial concern

Half of the 800+ respondents that BigHand surveyed say aged WIP is now the primary driver of cash-flow pressure (up from 32% last year). It is becoming increasingly difficult to predict when revenue will actually convert into cash.

Despite strong demand for legal services, a control problem is emerging.

The data shows a disconnect between work being done and value being realized. Matters linger, billing drifts, discounts increase, and write-downs accumulate, often unnoticed until they hit the P&L. Of the 90% that report increased write-downs year-over-year, nearly one-third cite average discounts between 11-20%.

Rate increases can temporarily offset this leakage, but they do nothing to address its causes. In fact, they can actively obscure them, delaying the moment when firms are forced to confront uncomfortable truths about matter management, pricing discipline, and financial visibility.

The AI Productivity Paradox: Faster Lawyers, Worse Economics

Nowhere is this tension clearer than in the way firms are grappling with AI. In theory, AI should improve profitability by making lawyers more productive. In practice, it exposes a fundamental contradiction at the heart of the billable hour model.

AI enables work to be completed faster. Around one-third of firms report accelerated task completion (29%), increased throughput (34%), and streamlined internal workflows (30%) as a result.  Clients know this (or believe they do), and many are already anticipating the priced-in efficiency gains when negotiating fees.

Firms, meanwhile, are often reluctant to provide transparency around how AI is used or how those efficiencies are reflected in pricing. The result is a growing expectation gap.

The data suggests most firms are poorly equipped to manage this transition. Only a minority (30%) can adjust pricing structures in real-time, even as client demands, matter scope, and delivery models shift. At the same time, billable hours are dropping across much of the market – 64% report an overall decline – yet almost all firms (99%) plan to increase targets next year.

This contradiction should sound alarm bells. AI is compressing time, but firm economics are still anchored to it. Without better financial intelligence at the matter level and without the ability to model, price, and manage work dynamically, productivity gains risk accelerating rather than preventing margin erosion.

When Commercial Acumen Becomes a Risk Factor

Historically, law firms have tolerated (even rewarded) partners who excel at legal work but struggle with the commercial realities of running matters profitably. That tolerance is running out.

BigHand’s report shows that more firms are tying financial discipline to compensation and performance management. Lock-up accountability and write-off reduction are increasingly being embedded into partner KPIs. Profitability is shaped as much by behavior and processes as it is by rates.

This accountability matters more than ever in an AI-enabled market. Clients now expect sophisticated, commercially literate conversations about efficiency, value, and the use of technology. Lawyers who cannot explain how AI affects pricing, scope, or outcomes (or who lack the financial insight to manage those conversations confidently) introduce real relationship risk.

Training programs, however, have not kept pace with these expectations, leaving many firms exposed. Only one-third (33%) of firms provide associates with structured training in financial performance, matter economics, or profitability management.

As Marina Raykin, CFO at Mintz, puts it in the report: “More attorneys are advancing to partnership without the commercial acumen or operational discipline required to effectively drive profitability.”

The Technology Gap You Can’t Ignore

For all the talk of digital transformation, the report highlights a persistent technology gap at the heart of law firm finance. Fewer than half of firms (46%) report using advanced business intelligence tools, and 38% admit they have no planned investment in this area. A quarter of firms still rely on manual, delayed, spreadsheet-based financial insight.

This matters because AI, alternative pricing, and client scrutiny all increase complexity. Managing that complexity with retrospective reports and disconnected systems is no longer viable. Firms need matter-level insight into utilization, pricing, lock-up, and margin delivered while decisions can still be influenced, not weeks after the fact.

The Inflection Point: Why 2025 Is the Last Year of Shelter

The central conclusion of BigHand’s 2026 Law Firm Finance Report, is that law firms are running out of places to hide. Rate increases will not continue to mask weak financial discipline, poor data, and underdeveloped commercial skills. AI will not magically fix broken processes. And clients will not indefinitely accept opacity around value and efficiency.

Rising write-offs, growing debtors, declining hours, and increasing discounting. All of them tremors that signal the risk ahead. What comes next depends on whether firms act now to strengthen their foundations, investing in better data, better systems, and better training before they hit the iceberg.

To explore the full findings, data, and analysis, including commentary from leaders at major global law firms, get your copy of The Profitability Inflection Point today.

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[ This is a sponsored thought leadership article by BigHand for Artificial Lawyer. ]