Law Firms Eye Mergers With Lackluster Demand Growth, Citi Finds

Modest demand for legal services and ballooning costs points to more industry consolidation in 2026 after dozens of law tie-ups were completed this year, Citigroup Inc. has found.

Law firm demand grew just 1.9% in the first nine months of the year, Citi found in a survey of more than 200 of the operations, including 80 of the largest 100 by revenue. The demand and a 9.6% increase in the rates firms charge their customers led to 11.3% revenue growth, the survey showed.

“When you’re operating in a modest demand growth environment overall—meanwhile, the cost of running these very sophisticated businesses is increasing—we will see continued consolidation occurring,” through lateral hiring or combinations, said Gretta Rusanow, managing director and head of advisory services at Citi’s Law Firm Group.

The prospect of more mergers comes as the industry has already been increasing tie-ups. Law firms completed 47 mergers in the first three quarters of the year, up from 43 in the same period of 2024, according to legal consultants Fairfax Associates.

Mergers announced this year include McDermott Will & Emery’s and Schulte Roth & Zabel; Herbert Smith Freehills’ and Kramer Levin; and Perkins Coie and Ashurst. Cadwalader Wickersham & Taft is reported to be looking for a merger partner.

“When you’re in an industry that grows demand on average less than 1% from one year to the next, the way to outperform your peers is to buy that growth” through mergers or lateral hiring, Rusanow said. “The way to outperform your peers is to take market share from others.”

Law firms have weathered an turbulent year that has included attacks by President Donald Trump and economic uncertainties with new and fluctuating tariff barriers. Citi found firms gaining from practices including litigation, bankruptcy, infrastructure, funds, and investment management.

“This year’s results show just how resilient this industry is,” Rusanow said. “Clients need law firms in good times and in bad times—and despite that market volatility hurting those transactional practices.”

Seniority First

The survey found 78% of large firms increased their associate ranks from 2019 to 2024, while almost 75% added income partners. Roughly 72% of large firms plan to invest in more income partners over the next two years and 86% plan on increasing their associate populations.

Only 37% of large firms plan to increase the size of their summer associate classes through 2027.

“That model will make sense in the age of generative AI as we see tens of thousands of hours potentially knocked out that would have been work that typically would have come to first- and second-year associates,” Rusanow said. “The demand will be more so for more seasoned expertise — that will be the distinguishing feature for any law firm.”

More law firms are beginning to see how GenAI can and will impact their businesses. Sixty-three percent of large law firms expect to it affect their lawyer leverage models, up from just 43% in last year’s survey and within the next two years, Citi found.

Thirty-six percent of large firms expect generative AI to affect their professional staffing models, up by almost double from last year.

AI Effects

GenAI “will reshape law firms, but not immediately,” said Brad Hildebrandt, co-author of the Citi report. “I don’t think we’re going to see layoffs of associates because of AI—they’re simply going to do something differently.”

But adapting a more senior leveraged model will come with higher costs, and firms will want to see the cost of that model justified through overall contribution to the firm, Rusanow said.

Income partners—also known as nonequity partners—are less productive than equity partners but cost more than counsel positions, the report noted.

“While there are lots of good reasons why firms are building an income partner group, it will need to be very carefully managed, otherwise it could be a pain point for firms from a profitability standpoint,” Rusanow said.