How can law firms thrive in 2026?

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In 2026, the legal sector continues to face a challenging economic outlook with key pressures including rising operational costs, talent shortages, AI adoption and a regulatory landscape that is rapidly evolving.

Against this backdrop, the firms best placed for success will be those that are strategic - streamline processes and embrace the advances in technology to drive efficiencies and defend against inflationary pressures in the sector, as well as focusing in client service. Below are some key considerations for law firms looking to continue to thrive.

Manage rising costs and margin pressure

Legal firms continue to face cost increases that outpace general inflation, driven largely by rising salaries and ongoing investment demands—particularly in technology and compliance. At the same time, clients increasingly expect certainty, transparency and value in return for their spend.

Improving enquiry management, tightening internal processes and ensuring the right people are focused on highvalue work can make a valuable difference. Regularly reviewing conversion rates and response times – there are consultancy solutions to help monitor this - as well and pricing options, will help firms maximise incoming opportunities and protect margins.

Deliver outstanding client experience

With competitive differentiation becoming harder, client experience is becoming an even greater driver of repeat business and referrals. Treating every client as a priority—through proactive communication, clear timelines and well-defined expectations—builds trust and reinforces value. An exceptional and seamless service not only provides positive client outcomes but also opportunities to cross-sell additional services and can make a measurable difference.

Firms that consistently deliver this level of service often see higher repeat instructions and stronger referral networks, which directly impact profitability.

Additionally, structured feedback processes and client surveys can highlight areas for improvement as well as identify those who are strong advocates for your firm and have the potential to become your best marketing tools. Reviewing feedback should become a key business strategy that helps shape your client experience.

Adopt new technology and AI

AI is shaping how teams work, and while it cannot replace legal expertise, it can help automate routine tasks, allowing fee earners to focus their time on more complex tasks. This means a greater volume of work can be handled without the need for more staff.

While advanced case management systems, AI-driven tools, and cybersecurity solutions are increasingly expensive, embracing new technology will be key to remaining competitive.

Furthermore, firms must ensure they plan carefully for implementation, are transparent about AI adoption and that their pricing models align with the efficiencies gained from new systems. Valuebased billing or revised hourly rates may be necessary to maintain profitability.

Regulatory challenges and increased scrutiny

In 2026, regulatory demands on law firms are set to grow, with firms facing greater oversight of both compliance processes and the way client matters are handled. Alongside shifts in AML supervision from the Solicitors Regulation Authority to the Financial Conduct Authority (in Autumn 2025) - which has raised concerns about what this will mean in practice and how it will be implemented - firms must now also consider the Government’s latest proposal to introduce an Interest on Lawyers’ Client Accounts Scheme., which could see up to 75% of interest on pooled client accounts and 50% of interest on individual client accounts redirected to the Government to support the justice system.

This represents a significant departure from the current model where many firms retain interest generated on client funds. Early analysis suggests the financial impact may be far greater than Government estimates, with Armstrong Watson’s benchmarking showing that client account interest has, for some firms, contributed 10–15% of net profit, particularly in a higher interest rate environment.

Firms will need to maintain strong regulatory discipline and follow developments closely to ensure they understand how they could be impacted.

Set your firm apart in 2026

In 2026, the law firms that stand out will be those that implement strategies to protect and improve profit margins, embrace the benefits and efficiencies of new technology, focus on delivering exceptional client service, and ensure compliance while keeping a close eye on further regulatory changes.