For decades, versatility was a selling point in the Australian legal market. Mid-sized firms built their identity on being broad — capable across practice areas, competitive on price, and close enough to premium to justify the positioning. With technological evolution in full swing and shifting market conditions, that model is now under a lot of pressure.
Alison Laird, Director of Innovation at the College of Law, has been watching this happen in real time. Her read on where things are placed: the middle ground is shrinking.
"The Australian market split into two viable operating models in 2025, and the gap between them is widening," she says.
"Scale-first firms are focused on volume, flexible pricing, operational efficiency, and managed services. Premium firms — the Big 8 — are 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."
The numbers back her up. Thomson Reuters' Australia State of the Legal Market 2025 report showed Australian firms posted 3.6% demand growth — only slightly down from the historically strong FY 2024 — but profitability split sharply across the market. Expense growth outpaced revenue growth at most firms, owing largely to intense hiring. Throw expensive AI licenses into the mix, and conditions are pitch-perfect for conversations around costs, operations, pricing/billing models and other innovations.
How firms sitting in the middle ground can pivot
For firms still sitting between these diverging models, Laird has advice on how to pivot and move forward strategically.
"The transition looks different depending on where a firm is starting from,” Laird explains. “For some, it's a genuine strategic pivot. For others, it's an acknowledgement of what the market has already decided for them."
What she sees working is a sequenced approach, and it starts with a decision many firms have been putting off.
"Stop trying to be everything to everyone," Laird says. "The firms making progress in 2026 are the ones that have made an explicit choice — not a hedged one — about which operating model they're building towards. That decision then drives everything else: which clients to pursue, which work to price differently, which capabilities to invest in, and critically, which work to stop doing."
The Actionstep 2026 Australian Midsize Law Firm Priorities Report found 59% of firms are now prioritising technology investment for cost reduction. Laird reads that as a sign operational efficiency has moved from an IT agenda item to leadership imperative. But technology investment alone won't resolve a strategic identity crisis.
"The firms I'm most concerned about are those still treating this as a future problem," Laird says.
“The trend towards market bifurcation – the split between ‘scale first’ and ‘premium’ firms – will likely only accelerate due to AI, pressures to drive down costs,” Laird says. “This, in turn, provides incentives to reconsider pricing and billable hour models, alternative fee arrangements, and business model innovation.”
For firms that have delayed, the realistic path may be narrower than they'd like. Exiting practice areas, restructuring the partnership model, accepting that some client relationships aren't viable at the margin they need — these are hard conversations. But the alternative is a limited market.
A question of talent in the age of AI
Alongside the operating model question sits a talent problem that Laird believes still isn't getting the leadership attention it deserves.
AI is absorbing the work that used to train junior lawyers — document review, first-draft research, routine due diligence. That work wasn't just billable. It was how lawyers learned to think, to spot issues, to build judgment under supervision. Take it away without replacing it, and the capability gap doesn't show up immediately. It shows up three to five years later, when firms need experienced mid-level lawyers, and they simply aren't there.
"This is the issue I think will define firm performance in the back half of this decade," Laird says. "As AI absorbs more repeatable work previously used to train junior lawyers, firms face growing capability gaps at the 3–6 PQE level. Graduate models need urgent redesign for an AI-augmented workforce."
Thomson Reuters draws a useful parallel to what happened in engineering when CAD technology eliminated the draftsman role. The firms that adapted didn't just automate the old work — they redesigned the entry point entirely, putting junior engineers into higher-complexity roles earlier, with more intensive supervision alongside them.
Laird says the legal profession needs to do the same.
"The firms getting this right are building what I'd call an AI-augmented apprenticeship," she says. "Graduates aren't doing less — they're doing different work earlier. That means rotating through roles like AI compliance oversight, legal data analysis, knowledge operations, and workflow design. These aren't peripheral functions. They're where the leverage in a modern firm actually lives."
Some firms are already moving. In the US, Ropes & Gray has allowed first-year associates to dedicate up to 400 hours — roughly 20% of their annual requirement — to AI training and experimentation. Latham & Watkins ran a mandatory two-day AI Academy for all 400 of its first-year associates, built around Harvey and Microsoft Copilot.
“This is what a truly ‘AI-first’ talent model looks like when it's taken seriously,” Laird says.
In Australia and New Zealand, Laird points to institutions embedding AI literacy not as a standalone module but as a thread running through the entire learning journey — from PLT to CPD, postgraduate study, and beyond.
“The College of Law's Centre for Legal Innovation has been exploring this: what does competence look like in an AI-augmented practice, and how do you build curriculum that reflects that reality rather than the one that existed five years ago?” says Laird.
"The firms that will win the talent war in 2026 and beyond are those that can answer a simple question from a graduate: what will I actually learn here, and how will you develop me for a career that doesn't look like the one your partners had?" Laird says. "If the answer is still 'you'll do the work AI hasn't taken yet,' that's a holding pattern not a strategy."
“So, you’re using AI. What does this mean for my legal bills?”
Given widespread expectations of efficiency around AI, pricing has, unsurprisingly, emerged as an issue.
Clients are no longer asking whether their firm uses AI. They're asking how it was used on their specific matter, and whether the efficiency it created actually showed up in what they were charged. Laird is clear about what that means for firms still billing on time.
"Stop treating this as a communications issue and start treating it as a pricing architecture issue," she says. "The answer to 'did efficiency flow through to price?' has to be yes — and you need to be able to demonstrate it. This is because Alternative Fee Arrangements (AFA) are, in this environment, no longer alternative. They are the norm.
How do you figure out how to price legal work under an AFA? It’s all about the data.
“Specifically,” Laird explains, “the kind of matter history that most firms have but haven't organised into anything useful.”
"Firms that are doing this well have built matter history databases — they know what comparable work has cost to produce, what the outcomes were, and where the risk sits," she says. "That historical data is the foundation for confident fixed-fee pricing. Without it, you're guessing, and the market will eventually price that guessing into your write-offs."
By contrast, firms that rely on partners to ‘just know how much to charge’ are reportedly seeing 10–20% write-offs on poorly scoped fixed fees.
Innovation needs to translate to value. The real opportunity, Laird says, is in value-billing, but only for firms willing to name and price their contribution explicitly.
“Firms that re-price AI-accelerated work will capture value, while those that don’t will lose it,” Laird says. "If AI compresses the time to produce a first draft, the value of the lawyer's contribution shifts to judgment, strategy, risk identification, and outcome certainty.”
"Those are things clients will pay for — often more than they were paying for hours. But you have to be able to name and price that value explicitly. 'We used AI to accelerate the drafting process; the fee reflects our expertise in reviewing, refining, and standing behind the output' — that's a defensible and commercially sound position. 'We used AI but charged you as if we hadn't' is not."
Firms that get this right will build a genuine competitive advantage — not just in client trust, but in margin. Those that don't will face cost disputes, regulatory scrutiny, and clients walking to law firms and Alternative Legal Service Providers that are already pricing transparently and proving it.
Key takeaways for 2026
Running through Laird's analysis of operating models, talent pipelines, and pricing architecture is a single consistent argument: 2026 is the year proof replaces promise.
"It's not enough to say you use AI, offer flexible pricing, or invest in people," she says. "What separates winners from laggards is operational proof. Leading firms are setting new benchmarks through published, verifiable results and ROI."
Clients want to know how AI was used on their matter, what time it saved, whether efficiency flowed through to price, how accurate the scoping was, and what outcome certainty was delivered. That's not an unreasonable ask anymore. It's the new baseline.
The era of unconstrained experimentation is over. As Laird puts it, every law firm leader entering 2026 should be sitting with one defining question: What business are we running, and what are we prepared to stop doing?
References:
- https://www.thomsonreuters.com/en-us/posts/wp-content/uploads/sites/20/2025/08/Australia-State-of-the-Legal-Market-2025.pdf
- https://www.actionstep.com/blog/actionstep-releases-2026-australian-midsize-law-firm-priorities-report/
- https://www.thomsonreuters.com/en-us/posts/legal/law-firm-associate-gap/
- https://www.americanbar.org/groups/law_practice/resources/law-practice-magazine/2025/march-april-2025/evolution-of-alternative-fee-arrangements-through-process-imporvement-methodolgies-and-ai/
- https://www.collaw.edu.au/community/news/a-guide-to-balancing-ai-era-billing-with-the-legal-professional-conduct-rules/
- https://elevate.law/expertise/legal-market-in-2025-and-into-2026-from-experimentation-to-execution/
- https://www.ropesgray.com/en/news-and-events/news/2025/12/amy-ross-and-megan-baca-discuss-how-ai-is-changing-law-firm-training-strategies
- https://www.legaltech-talk.com/what-one-big-law-firm-told-400-young-lawyers-about-using-ai/
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