In recent years, inflation has put extensive pressure on the legal industry. According to our 2024 Legal Risk Index Report, 50% of attorneys now cite inflation as the biggest danger to their firm’s bottom line. And they’re not wrong. From rising overheads to mounting pressure on pricing, firms are feeling a squeeze that’s not likely to let up anytime soon. As financial pressures mount, strong law firm financial management has become a critical part of running a firm.
Inflation’s impact on law firms is compounded by several economic factors. Recent tariffs on goods and services make it more expensive to operate and grow. If your law firm is already undergoing tighter margins, these added cost pressures should be addressed.
In this article, we’ll break down the real ways inflation is affecting law firms today and share practical strategies you can use to maintain profits, stay resilient against inflation, and position your firm for growth.
How inflation is hitting law firms harder than ever
Inflation is reshaping the day-to-day economics of running a law firm. The cost of everyday expenses like rent, salaries, software, and malpractice insurance is climbing. When firms are already balancing high client expectations with tight margins, these increases quickly add up, putting pressure on them.
Rising operational costs for attorneys
Unfortunately, many key law firm expenses — office space, insurance premiums, vendor contracts, utilities, etc. — are both non-negotiable and currently increasing.
In fact, rising business costs were the most commonly cited financial pain point in our 2024 survey, with 58% of attorneys reporting that they are directly impacting their bottom line.
Firms that transitioned to hybrid or remote models during the pandemic are experiencing higher demand for more flexible infrastructure. This may include things like shared workspace subscriptions for your staff, cloud-based platforms to improve communication, or upgrades to home office tech.
Tech investment pressures
Investing in legal technology has become essential to productivity and client services for law firms. That said, keeping up with the latest changes, even if they do give you a competitive edge, isn’t cheap.
Inflation has pushed up the price of licenses, subscriptions, and implementation costs. At the same time, the pressure to adopt new tools is growing fast.
This creates a tricky double bind. Technology enables firms to stay competitive, but the cost of staying ahead of these trends continues to rise. Plus, it can be difficult to establish a clear return on investment (ROI), making it easy for leadership to delay investments that could actually improve margins in the long term.
Recruiting and retention
The legal industry is also dealing with significant recruitment and retention challenges. Our report found that:
- 50% of law firms faced employee retention challenges in 2023
- 52% of legal professionals are making employee retention and hiring a top priority in 2024
This talent crunch is exacerbated by shifting work preferences. Many attorneys are seeking flexible work arrangements and a better work-life balance. Firms that fail to adapt to these expectations risk losing top talent to more accommodating competitors or online freelancing platforms like Hire an Esquire.
Insurance costs are also on the rise, which adds another layer of financial pressure on law firms. For lawyers, insurance is non-negotiable, especially policies like cyber liability and malpractice insurance.
Recent data indicates that the industry anticipates premium increases of 10-15% in catastrophe-prone regions, for example. Carriers are also implementing stricter underwriting criteria for cyber coverage in response to escalating threats.
With rising insurance costs, it’s extremely important to take a proactive risk management approach and look for coverage options that align with your firm’s needs.
Client price sensitivity
Law firms are certainly not the only businesses that are affected by inflation. Costs have been increasing dramatically across the board. This means that clients — especially any businesses that you represent — are becoming far more cautious about their spending.
Even long-standing clients are questioning rates, pushing back on billable hours, and asking for more flexible pricing structures.
This sensitivity is showing up across multiple firm sizes. According to our Legal Risk Index report, nearly 1 in 3 attorneys are facing client pressure to reduce costs. Since clients also face tighter budgets and internal cutbacks, law firms are under pressure to provide more transparency and justify every hour billed.
If your firm relies heavily on hourly billing, this shift in client expectations can quickly erode your margins.
The long-term risks of ignoring inflation
Inflation is not a short-term inconvenience, and treating it as such is a risky move. To keep your law firm in a healthy financial place, plan for sustained economic pressure so that you can mitigate inflationary risks.
Here are some of the major long-term risks of ignoring inflation:
Profit margin erosion
If you choose to absorb rising costs instead of raising rates or reworking pricing models, your profit margins will take a direct hit. Over time, that margin pressure often trickles down to attorneys. They’re then expected to bill more or take on heavier caseloads. In some cases, this delays much-needed hires like paralegals and assistants just to keep revenue stable.
It’s a short-term fix with long-term consequences. Our report found that 45% of attorneys reported that burnout was affecting performance across their entire firm, and nearly one in three firms expressed concerns about billable expectations leading to employee turnover.
Missed growth opportunities due to capital constraints
In order to grow your firm, you’ll need capital. Whether it’s expanding into a new market or launching a practice area, your law firm needs proper cash flow to move forward. But as inflation eats away at profitability, those forward-looking investments tend to be pushed down the priority list (or cut altogether).
The result? Firms end up stuck in maintenance mode, unable to take advantage of opportunities as they come along. Meanwhile, competitors may be modernizing and expanding while inflation-hit firms fall behind.
Losing top talent to more financially stable firms
When margins tighten, compensation freezes, and workloads grow. It’s a familiar pattern, but in today’s market, top legal talent has options. Firms that can’t offer competitive pay, flexibility, or a sustainable work environment risk losing high performers to better-funded competitors.
In 2024, 52% of attorneys identified talent acquisition and retention as a top priority, with many pointing to financial instability as a key driver of current turnover rates. It’s one of the offshoots of inflation. This impacts your ability to attract and keep the people who power your business.
Weakened client relationships due to cost-cutting measures
Clients are currently more price-sensitive, but that doesn’t translate to a willingness to compromise on service. Unfortunately, when firms go too far with budget cuts, the client can experience suffer. Moves such as letting go of support staff, rushing billable work, or delaying investments in client-facing tech all add up over time to the detriment of service quality.
And it doesn’t go unnoticed. Our report found that 31% of attorneys said rising client expectations were creating operational strain, particularly around responsiveness and perceived value. Cost control is certainly important, but when it comes at the expense of service quality, it can quickly erode trust and client loyalty.
Increased risk of a data breach and other exposures
As inflation drives up the cost of data breach response, many law firms are finding themselves underinsured and unprepared. Cyber threats continue to rise, but few firms are adjusting their insurance policies to match the reality of today’s risk environment.
Our Legal Risk Index found that only 14% of law firms planned to enhance their insurance coverage this year, despite acknowledging increased risk, which is a dangerous mismatch. Failing to update your coverage in line with inflation and threat levels could leave your firm paying significantly more out of pocket if and when a breach occurs.
Strategies to mitigate inflation and protect your firm’s profitability
Inflation may be the top concern for law firms in 2024, but it’s not stopping everyone. In fact, 35% of firms are still prioritizing growth despite economic pressures. So, with the right strategy, profitability and resilience can go hand in hand.
The key is to stop reacting to inflation and start planning proactively. A few smart shifts in your law firm financial management can go a long way. Here are some of our top strategies your firm can implement.
Rethink pricing models and fee structures
Rigid hourly billing can quickly become a friction point for budget-minded clients. Forward-thinking firms are getting creative with pricing, both to stay competitive and to align better with client expectations.
This includes Alternative Fee Arrangements (AFAs) like fixed fees, capped fees, and contingency-based models. Value-based billing, where pricing reflects outcomes rather than the time spent, is also gaining traction in areas such as corporate counsel and M&A support. Another relatively new pricing model is packaged legal services.
Use technology to boost productivity
When inflation puts pressure on profitability, squeezing more value out of your legal team’s time becomes essential. But instead of forcing unrealistic expectations, you can use technology to make a real difference.
Firms are increasingly investing in tools like document automation, AI-driven research assistants, and workflow management systems to help reduce the amount of time lawyers spend on repetitive or administrative tasks. After all, the ultimate goal for any attorney is to spend as much time as possible on billable hours.
The goal is to improve output while also supporting a healthier workload and helping your team focus on client-facing work.
According to the 2024 Legal Risk Index, firms that had already invested in legal tech reported higher profit margins and stronger retention rates, even as operating costs rose. In this way, tech isn’t just a nice-to-have. It’s a strategic lever for productivity and profitability.
Diversify revenue streams and services
Relying too heavily on a narrow set of practice areas or billing methods can leave your firm vulnerable when the market shifts. Diversify your revenue streams to open up new opportunities and stabilize revenue during slow periods in your core areas.
That could mean launching subscription-based legal services for startups. Or you could explore expanding into adjacent practice areas (like compliance or privacy law). Some firms are even creating alternative legal service providers (ALSPs) under their umbrella to attract different client segments and increase profitability without diluting their core brand.
Improve operational efficiency
Inflation quickly exposes inefficiencies. If your internal processes are clunky, the impact of rising costs will only be magnified while your margins take the hit.
Here are a few ways firms are tightening operations without sacrificing quality:
- Auditing internal workflows to identify bottlenecks or duplicated effort. Many firms find they’re spending far more time on admin than they realized.
- Outsourcing non-core tasks like bookkeeping, marketing, or document review, where possible, can cut costs while freeing up your team to focus on legal work.
- Spending time to reevaluate vendor contracts (e.g., legal research platforms, office leases). This can help you uncover where you’re still getting value and where you’re paying for legacy systems you’ve outgrown.
Improve client communication and relationships
Let’s say a corporate client calls with concerns about rising legal bills. They’re not threatening to walk, but they’re clearly frustrated. You’ve raised rates to keep up with inflation, but that doesn’t mean the client understands what’s changed. That kind of misalignment is becoming more common and has the potential to seriously erode client trust.
In the legal industry, it is hard to overstate the importance of communication. It is one of the most overlooked drivers of profitability. When clients understand the value you provide and feel like their concerns are being heard, they’re more likely to stay with your firm, even after a pricing shift.
Firms that invest in and prioritize communication are better positioned to retain clients, even in tough economic conditions such as inflation. And in many cases, they’re also uncovering cross-sell opportunities simply by staying closer to their clients’ evolving needs.
Plan for the unexpected: Financial resilience
If the past few years have taught us anything, it’s that “business as usual” can change overnight. Inflation is just one pressure point, but it’s a reminder that firms need a plan for financial uncertainty rather than just hoping that things level out.
Building financial resilience doesn’t mean hoarding cash or slashing budgets across the board. It means taking a deliberate approach to things like:
- Scenario planning: What happens if your biggest client cuts their legal spend by 30%? Or if your office lease jumps next year?
- Maintaining a cash buffer: This is not just about weathering dips in revenue, but taking advantage of unexpected growth opportunities.
- Stress-testing your pricing and cost models: Can your current setup withstand 10% higher overhead next year?
According to our 2024 Legal Risk Index, firms that reported higher financial preparedness were more likely to prioritize growth, even in the face of inflation.
How growth-minded law firms are responding
Many firms are embracing smarter processes, sharper positioning, and new models to combat inflation. Below are a few real-life examples of what that looks like.
Leveraging technology to reduce costs without compromising quality
AI is changing the way businesses operate, and law firms are no exception. Take Allen & Overy, which rolled out “Harvey,” a custom generative AI tool that 25% of their team of 3,500 lawyers now use daily to speed up contract drafting, research, and multilingual translations.
Take advantage of new working norms
Working from home, either fully remote or in hybrid systems, is quickly becoming standard practice for many organizations now that the technology is available to make it easy. Law firms can take advantage of this to reduce overhead on expenditures like rent. Amidst a legal dispute with a landlord, Crowell & Moring took the opportunity to downsize from its massive 391,000 square foot office to the top five floors of a new development. Now, their staff are coming to the office 2-3 days per week.
Re-assessing necessary overhead spend like insurance
A key area law firms can look at to reduce costs without compromising the client experience is insurance. However, when it comes to making a switch, proper coverage in all areas is still essential to mitigate risk. Goldstein Hall worked with Embroker to reduce their insurance premiums by 28% per lawyer.
Exploring new fee structures and subscription pricing models
With inflation also affecting clients who may be more inclined to negotiate hours and rates as a result, some law firms are re-examining how they structure their fees. The Prinz Law Office in Silicon Valley introduced tiered flat-fee subscriptions for its startup clients, providing a more predictable cost structure with an add-on menu for more ad-hoc needs.
Don’t let inflation define your firm’s future
Inflation may be a top concern for law firms in 2025, but it’s far from unbeatable. With the right strategies, such as clear communication, financial auditing, and the adoption of new technology, your firm can protect its margins and stay relevant in a competitive market.
Want more data-driven insights into what your law firms can do to stay ahead? Check out our 2024 Legal Risk Index today.
