Transformation in legal departments in 2026 – the most important trends and best practices

Three topics in particular are currently driving the transformation of the legal department: AI, the rapid increase in regulation and geopolitical developments.

There has always been technological progress, which has also had an impact on the processes of the legal function. But with AI, things are different: AI is putting in-house lawyers under massive pressure to become more efficient. The increasing compliance requirements with a constant or decreasing headcount are also forcing a more efficient way of working.

KPMG Law has been surveying legal departments of German and international companies on their challenges and approaches for more than ten years. Today, the legal department report “Recht auf Fortschritt” is considered one of the most well-founded sources for structural and strategic developments in the legal sector. We also support numerous legal departments in their transformation processes.

These are our findings from the study and our practical work on the status of the legal function:

Process optimization and increased efficiency are the most important goals of legal departments to date

Efficiency is clearly at the forefront of legal departments’ objectives. In our last survey in 2024, 91% of legal departments cited process optimization as a key task, while 88% reported more work with the same number of staff. Cost optimization was the focus for 79% of legal departments and 73% even had to deal with budget restrictions.

Geopolitics directly affects legal work

The increasing tensions between global economic areas, in particular the USA, Russia and China, have a direct impact on legal work. As a result, companies must not only keep an eye on their national legal framework, but also on the international legal framework. Sanctions, trade agreements, customs duties and political restrictions require ongoing legal evaluation and process adaptation.

Regulatory dynamics are one of the biggest challenges

The density of regulation is increasing significantly. As early as 2024, 74% of respondents saw this as one of the biggest challenges. With the EU’s Green Deal and the European digital strategy, companies will be faced with numerous new laws that need to be implemented. The fact that the EU is backtracking in some areas with the omnibus initiative buys the economy time, but does not necessarily give companies more legal certainty. Processes must be continuously adapted to new regulations and cooperation with compliance, IT and other specialist departments is becoming ever closer.

Monitoring of complex issues is often handled by external law firms

Legal departments are increasingly leaving the monitoring of complex issues to specialized law firms, which serve several clients more efficiently thanks to economies of scale.

The in-house lawyers evaluate the law firms’ monitoring analyses and compare them with company-wide data and risk assessments. Regular data exchange and automated interfaces make decisions and analyses significantly more data-driven.

These developments make it clear that the legal function is changing from a reactive authority to a proactive unit. Today, it acts as an early warning system, strategic advisor and active co-designer of business decisions.

AI as a driver of legal transformation

Almost all legal departments and law firms have already had experience with AI, some of it sobering. Nevertheless, artificial intelligence remains a key topic. The use of AI is no longer a question of whether, but only of how.

Legal departments now seem to be overtaking traditional law firms when it comes to the use of AI. While many law firms are still evaluating, legal departments are already implementing specific AI-supported solutions to automate routine tasks and free up resources for strategic issues.

The reasons are obvious: cost and efficiency pressure, many standardized workflows on the one hand and less resistance to innovation on the other. Close interfaces with the IT department and Legal Operations also facilitate the introduction of data-driven processes. With their IT budgets and IT teams, larger companies have different options than some law firms.

Proportion of lawyers in the legal department falls

Digitalization goes hand in hand with another development: the proportion of lawyers in legal departments is falling. In our last survey in 2024, around 85% of teams still consisted of fully qualified lawyers. The proportion is likely to have fallen further since then, as legal departments have now automated some of their tasks. Analyses show that 20 to 40 percent of work in legal departments will be automated in the future. At the same time, new roles are emerging, such as IT and process experts.

Several factors count when selecting external law firms

AI is not the only way to relieve the internal legal teams. Some tasks are still outsourced to external law firms. These are usually strategically complex issues such as transactions or disputes, especially if special expertise is required. In-house teams focus on business-related advice, risk management and coordinating external partners.

When selecting external law firms, legal departments no longer only look at legal expertise, but increasingly also at factors such as the use of technology, price structure, flexibility, understanding of the industry and diversity, equity and inclusion (DEI) standards.

From hourly fees to results-oriented remuneration models

There is another trend when it comes to working with external law firms. The traditional hourly billing model is no longer up to date when work becomes more efficient thanks to automation. Law firms only have incentives for greater efficiency if the result is rewarded. Alternative remuneration models are therefore increasingly being used, such as price-per-unit approaches, where a fixed fee is agreed for each contract reviewed. They offer transparency, scalability and greater planning security. In addition, many legal departments rely on service level agreements (SLAs) to define the scope of services, quality and response times in a binding manner, particularly for standardizable or outsourced services.

The legal department is increasingly developing into a strategic partner

The role of the legal department is increasingly becoming a strategic one. It is important to involve lawyers in business processes at an early stage, ideally in the initial development phases of business models and digital transformation projects. The “embedded law” concept integrates law directly into processes and systems. In this way, compliance and risk management are systematically embedded in the operational process.

Only through this close integration of law, technology and business can the legal department reduce complexity in a targeted manner, proactively manage risks and establish itself as a driver of corporate strategy.

The five pillars of modern legal departments

Based on the results of our legal department report and our practical experience with numerous transformation projects, five key areas of action have emerged that are crucial for the future success of legal departments.

1. Transparency
   Legal departments should analyze and optimize their service portfolios and internal processes. This enables them to manage and prioritize better. Automated self-service offerings, activity analyses and clear responsibilities are important in order to reduce frictional losses and increase efficiency.
2. Automation
   Technology solutions such as automated contract generators and AI-based analysis tools reduce manual effort, increase the speed and quality of legal work and establish the legal department as a driver of innovation. The prerequisite for this is the structured preparation and evaluation of data.
3. Resource optimization
   External service providers should be managed and integrated in a targeted manner. This ensures efficient service provision that creates the greatest possible added value for the company.
4. Scalability
   Flexible (including external) service delivery models, governance structures and competence centers make it possible to keep pace with the company’s growth and changing requirements.
5. Strategic integration and collaboration – internally and externally
   The legal function is increasingly involved in business decisions at an early stage. Close cooperation and data exchange with specialist departments, partners and management promote proactive, risk-oriented advice.

Legal departments should actively shape change

Our forecast: Artificial intelligence, geopolitics and a rapidly changing regulatory environment will continue to keep legal departments busy. One thing is certain for us: a legal function that actively shapes change rather than reacting to it will turn its department into a driver of efficiency, innovation and strategic success.

You can also listen to our podcast KPMG Law Operator on the topic of trends and innovations for legal departments.