The legal tech industry, awash with capital, faces a significant hurdle in realizing the full potential of automation: making legal data machine-readable. This crucial step involves annotating and labeling legal data to prepare it for use by artificial intelligence (AI) systems. While investment in legal technology continues to grow, with the market expected to reach $33.25 billion in 2025, the less glamorous work of data preparation remains a critical bottleneck.

Firms are increasingly adopting AI-powered tools to improve efficiency and reduce costs. More than half of in-house legal professionals feel their departments are under-resourced, and they see technology as a way to streamline processes. The rise of AI-driven tools comes at a time when legal departments are under increasing pressure to handle more tasks while controlling costs. The use of legal technology is expected to increase, with many departments reporting stable or increasing budgets for technology investments.

Large language models (LLMs), like those powering chatbots such as ChatGPT and Gemini, are playing a more prominent role in the legal field. These models can generate legal contracts, summaries, and answers to legal questions, which automates routine tasks and enables legal professionals to focus on more complex challenges. This automation includes document reviews, discovery, contract management, and data processing.

However, the effectiveness of these AI tools hinges on the quality and accessibility of the data they use. Legal data is often unstructured and complex, requiring significant effort to convert it into a format that machines can understand. This is where the process of annotation and labeling becomes essential.

Several key trends are shaping the legal tech landscape in 2025. Legal process automation is transforming the day-to-day activities of lawyers. As legal departments become more efficient in using technology to accelerate workloads and reduce costs, professionals can focus on strategic, high-value tasks such as interpersonal communication, relationship-building, and complex problem-solving. AI-powered tools are among the fastest-growing solutions being adopted by legal departments.

To prepare for the increasing adoption of AI, legal departments are taking proactive steps, including conducting technology audits to assess the utilization of existing legal tech solutions. These audits help prioritize investments in tools that address the department's most pressing needs. Departments also need to ensure they have sufficient resources for implementing new technologies and understand that AI implementation may require new processes.

The integration of AI is no longer optional but has become a fundamental competitive advantage for legal professionals. Lawyers who embrace AI are likely to be seen as experts and command higher fees for their expertise. Law firms are in a race to adopt AI tools and demonstrate their value before their corporate clients do.

Looking ahead, legal technology is projected to continue expanding, with AI, automation, and cloud tools becoming standard across firms. The need for faster workflows, better compliance, and lower operational costs will drive this growth.