If 2024 was the year legal markets discovered generative AI, 2025 was the year they learned what it takes to make it work. Across Australia, New Zealand, and the broader Asia-Pacific region, law firms moved from pilot programs and vendor demonstrations into ‘industrialised realism’, a period of rigorous operational stress-testing where hype met governance, risk, and commercial discipline.

The market that looks fundamentally different heading in 2026 than it did 18 months ago. AI adoption accelerated faster than many expected, pricing models moved from optional to unavoidable, and operating model decisions that firms had delayed for years could no longer be ignored.

According to Thomson Reuters’ 2025 State of the Legal Market report, Australian firms experienced 3.6% demand growth, the strongest since 2008, but profitability diverged sharply. Large firms leaned into scale-first strategies, the Big 8 benefited from premium positioning, and the middle ground continued to erode. Meanwhile, cost growth outpaced revenue growth across most firms, meaning pricing discipline and operating efficiency are now core strategic imperatives.

What Changed in 2025

AI Moved from Pilots to Governed Production

By the end of 2025, 93% of Australian mid-sized firms were using AI, with 79% of professionals incorporating it daily; a significant increase from 2023. Adoption rates were extraordinarily high, but governance became the real story. Firms shifted from fragmented experimentation to structured, centrally governed rollouts with defined use cases, data boundaries, and risk frameworks. Harvey partnerships expanded globally (A&O Shearman, Ashurst, Gilbert + Tobin), while firms like Linklaters, Allens and MinterEllison went with Legora with others embedding Microsoft Copilot into core workflows. Singapore’s Ministry of Law published its GenLaw.AI Guide, and New Zealand courts established formal expectations around AI-assisted submissions.

AI moved from innovation agenda item to operational infrastructure. But while 67% of corporate counsel now expect their law firms to use GenAI, only 34% of firms have adjusted pricing to reflect AI-driven efficiency. That gap represents margin leakage that’s accelerating.

Alternative Fee Arrangements Became Default

Alternative Fee Arrangements (AFAs) are the norm now, instead of an alternative. Around 88% of Australian firms now use AFAs extensively, with fixed fees representing roughly 50% of work for many firms, up from just 20.6% of revenue in 2022.

Clients’ expectations have also hardened. Half of in-house teams now prioritise predictability over lowest headline price, and they’re benchmarking law firm pricing against ALSPs like Elevate and Axiom, which report 30-50% cost savings on comparable work.

The commercial impact has been immediate. Those relying on partner intuition are seeing 10-20% write-offs on poorly scoped fixed fees. Innovation theatre is over. Clients want operational proof.

The Australian Market Bifurcated

The Australian market split into two viable operating models in 2025, and the gap between them is widening.

1. Scale-first firms: focused on volume, flexible pricing, operational efficiency, and managed services.
2. Premium firms (the Big 8): focused on complex, high stakes matters supported by deep expertise and reputation.

What’s disappearing is the middle. Firms trying to blend these models without definition are finding it harder to win work and harder to protect margin. As one managing partner said during a recent panel: ‘We had to stop pretending we could be both. The market won’t let you anymore’.

Five Critical Signals for 2026

These signals will define which firms strengthen margin, and which don’t, in the year ahead.

1. AI value is shifting from productivity to leverage and risk allocation. The questions at hand are: who owns the margin it creates, and who carries the liability when things go wrong? Firms that re-price AI-accelerated work will capture value, while those that don’t will lose it.
2. Margin pressure is structural. Cost growth has structurally outpaced revenue. Pricing capability and operating model efficiency have become leadership issues. Firms with financial discipline are protecting margin; those relying on ‘finger in the air’ pricing are not.
3. Operating model bifurcation is accelerating. Firms must choose either scale and efficiency, or premium expertise. The middle ground, firms trying to do both without clarity, is disappearing fast.
4. Client buying behaviour is hardening. In-house teams are rationalising panels, building their own AI capability (often faster than law firms), pushing routine work to ALSPs, and demanding measurable outcomes. Execution and predictability matter more than rhetoric.
5. Firms that centralise technology, risk, and governance will win. This unlocks 300-500 basis points of margin improvement on repeatable work by late 2026.

What This Means for Law Firm Leaders

First, pricing and scoping have become core leadership capabilities instead of operational details. Firms with financial discipline are protecting margin; those without it are not.

Second, firms need to make an explicit operating model choice. The market is rewarding either scale and efficiency or premium expertise. Trying to do both is driving underperformance.

Finally, talent risk has become delivery risk. With fewer juniors being hired as AI absorbs more repeatable work, firms face growing capability gaps at the 3-6 PQE level. Graduate models need urgent redesign for an AI-augmented workforce.

From Claims to Proof

Differentiation has shifted fundamentally. It’s not enough to say you use AI, offer flexible pricing, or invest in people. What separates winners from laggards is operational proof. Leading firms are setting new benchmarks through published, verifiable results and ROI.

Clients want transparency:

• How AI was used on their matter
• What time it saved
• Did the efficiency flow through to price?
• How accurate was the scoping?
• What outcome certainty was delivered?

The 2026 Mandate

As 2025 taught us, the market is pragmatic. AI, AFAs, and operating changes stuck only where they solved real commercial problems. Evolution beat disruption. Change happened within constraints instead of collapse.

The era of unconstrained experimentation is over. 2026 will reward firms that prepare deliberately, stabilise discipline, and scale what works. It will punish ambiguity.

As we enter 2026, every law firm leader should be asking one defining question:

What business are we running, and what are we prepared to stop doing?

As firms move from intention to evidence, Elevate provides the operational infrastructure that enables pricing discipline, governed AI adoption, and consistent delivery quality. Our teams help law firms translate strategy into measurable performance through technology enablement, project management, and flexible talent.