Another strong year likely for California law firms

The year ahead is shaping up to be a strong one for law firms in California and throughout the country. While potential changes in federal policy and economic conditions may present some uncertainty for law firms in 2025, the tailwinds that propelled the industry to a strong performance last year are once again primed to push firms forward.

According to Jeff Grossman, cofounder and CEO of Oxford Strategic Legal Advisors, "2024 will prove to be a good year for most of the industry. We expect firms to see top-line revenue growth of high single digits to the mid-teens, or in some cases even higher. Profitability will grow commensurately, however, there is a portion of the industry that have not seen this type of growth."

Fueled by steady demand and higher rates, BMO expects that 2025 will be another strong year for law firms. As the Trump administration's priorities and actions firm up, and the course of the nation's economy is set, it will become easier to identify the services which will see the highest surge in demand.

For example, although the deregulatory leanings of the new administration could cause litigation to slow, transactional activity may accelerate, with outcomes depending on economic factors like trade wars, budget deficits, long-term interest rates and stock market valuations.

Grossman added, "2025 has the ingredients to be a strong year as well, especially given the budgeted rate increases. Based on BMO's economic forecast and the impact of interest rates, the strength of the year will be determine based on when law firm transactional activity actual kicks into gear."

Economic outlook

This year's economic environment for law firms is similar to 2024, as consumers and corporations remain fundamentally sound with modest leverage and ample spending ability. While the Fed may only deliver a few additional rate cuts in 2025, this stance can still offer favorable conditions and market support. 

The year ahead may differ in that there could be a slightly more challenging capital markets environment due to long-term interest rates staying stubbornly elevated and valuations trending higher.

The primary economic risks ahead revolve around uncertainty regarding federal policy stances. For example, the Trump administration is typically perceived to be pro-growth, but also emphasizes fiscal restraint and advocates for tariffs, while supporting deal-making to bring back manufacturing jobs.

Ultimately, "Trump 2.0" will likely be more about trade policy than tax cuts, primarily because the fiscal deficit projections going forward are already straining at over 6% of GDP as debt levels rise exponentially. Large firms with business influenced by global trade and international capital markets could therefore be impacted the most by these developments.

Furthermore, if President Trump advocates for deregulation as anticipated, demand for related legal services could increase, as any changes are both interpreted and enacted--or perhaps even challenged in court. Demand for corporate services could also tick up if cash-flush companies spend more and pursue deals as the result of a business-positive environment. In this scenario, firms could also benefit from a robust M&A market.

Legal industry changes

As policies change and the economy shifts, law firms of all sizes are keenly focused on managing their partnerships, not just as a profession but as a business. They manage profitability in a way that they haven't had to in the past, due to a combination of the pressures in growing demand and a significantly rising cost base.

Firms have adjusted their overall capitalization, including their partners' capital, often using retained earnings to address the significant investments needed to run and grow a law firm. They have also obtained lines of credit (typically undrawn) as a type of insurance policy, ensuring that they always have significant reserves to protect against capital inefficiency and industry risks.

Proactive approaches to generating revenue have also become more common. Large and mid-sized firms have developed focused growth strategies around laterals, spurring client acquisition and business development by bringing in partners individually or as groups. 

Regional firms are acutely focused as well--not only on growing their revenues like the bigger firms, but on increasing the productivity of their lawyers, which in many cases has fallen year after year.

Technology is also changing the legal field, led by artificial intelligence, which firms are using to become more efficient in core functions such as due diligence, legal research and crafting contracts. Firms are leaning on AI so much that 57% of lawyers expect associates to have AI experience, and for new legal professionals to have at least a basic familiarity upon hiring, according to Bloomberg Law research.

Profitability is also boosted by firms' continued ability to increase their rates, which has pushed firms to gradually higher revenues for three years now. In combining higher rates with growing demand, large firms may scale up as specialist firms, augmented by technology, emerge.

California growth

As law firms have grown, they often face more complex wealth, credit and treasury management needs--but busy lawyers rarely have time to focus on wealth planning. Financial services providers such as BMO have therefore expanded their presence and offerings in California to help meet this increasing demand.

The recent expansion of BMO's Law Firm & Professional Services Group added 20 banking, investment and planning professionals based in California and New York supplementing an existing team based in Chicago. By working with a team of wealth advisors who have deep knowledge and experience dealing with lawyers and law firms, clients can save time and frustration, as they don't have to explain the profession's unique cash flow, credit, and wealth management needs.