Key Takeaway: Legal departments have long built budgets from backward-looking e-billing data, educated guesses, and broad assumptions about matter volume, outside counsel rates, and business signals. AI changes the math by making spend analysis more dynamic: it normalizes billing data, classifies legal work, identifies the patterns behind overruns, and surfaces right-sourcing opportunities to inform better budget decisions.  

During budget season, the legal department must answer forward-looking questions with backward-looking data that can be highly variable. Often, legal operations are responsible for that analysis, tasked with developing assumptions on next year’s outside counsel costs, which can be as much as half the legal budget.

The e-billing system is the source of truth for outside counsel spend, but data can be voluminous and incomplete. In prior years, the legal operations professional would either need to invest significant time to make sense of the data or use it for high-level totals and estimate the rest. With modern AI tools, legal operations are now structuring, analyzing, and interrogating spend data to bring budgeting from a high-level conversation to a fact-based, detailed decision.

The Perennial Budgeting Challenges, and How AI Helps

AI does not eliminate the challenges of legal budgeting, but it does provide a better framework for addressing them.
 


By combining historical spend data, business context, and predictive analysis, legal operations teams move beyond reactive budgeting and take a more proactive approach to planning. The following recommendations highlight some actionable ways to apply AI and improve budgeting accuracy.

1. Start With Clean Spend Data, Not Just Last Year’s Totals

Most e-billing data is already detailed and well-structured thanks to uniform task-based management system (UTBMS) codes and legal electronic data exchange standard (LEDES) formatted files, but unless the legal department enforces its outside counsel guidelines (OCGs), the data will be dirty or incomplete.  Roughly one third of all line items that Epiq analyzes during a spend analysis will either be block-billed or vaguely described, which can obfuscate the true purpose of the work. While traditional methods to clean and structure data still work well, they are time consuming. AI enables the legal operations analyst to clean data at scale and classify work based on language patterns rather than keywords. A normalized and detailed data set is your best friend when estimating a budget, so invest up front to make your budget planning easier.

2. Use AI To Interrogate the “Partially Known”

If the legal department requires its law firms to submit budgets through the e-billing system or as a matter-level bid, then combining those agreed budget inputs with well-structured billing data will answer the question on in-flight spend to budget. AI improves accuracy by analyzing billing patterns, staffing models, and even outcomes to put a finer point on the expected budget.

For certain matters that don’t exist yet, here again AI can forecast based on last year’s events and expected growth in the company. With some matters, like employment or IP, teams can forecast based on business strategy and prior costs. By expanding and interrogating existing data, legal departments now begin asking “What is likely to happen next year?” rather than assuming last year’s budget will repeat next year.

3. Build Rate Increases Into the Forecast, Then Find Ways To Reduce Work

Rate increases continue to accelerate. The 2026 Thomson Reuters Law Firm Rates reports an average increase of 7.4%, with Am Law 100 firms well over 9%. In the current state, both finance and the legal department need to find a middle ground. Legal departments need to push back on rates, and finance needs to offer some near-term relief. Longer term, the legal department should look to capture the value of AI using their OCGs. In litigation, for example, AI is eliminating whole categories of work. With updated OCGs and AI to scan invoices, the legal department should aggressively mark down billed time where AI could reasonably do the work. State boards and bar associations already support this interpretation, so the legal department should start enforcing it.

4. Make the Business Case for Right-Sourcing

The in-house and outside counsel budgets should not exist in silos. They should be managed in tandem with a broader view of how work should be sourced. Some recurring work may justify an in-house hire. Some may be better supported through flexible legal talent, or engaging an ALSP.

AI identifies right-sourcing opportunities by classifying work at a more granular level, showing where law firm time is being spent on repeatable activity, comparing cost across sourcing models, and developing the business case to shift that work. If finance is pragmatic, and the business case is clear and measurable, right-sourcing secures additional headcount for the legal department.

5. Turn Budgeting Into an Ongoing Legal Operations Capability

Spend analysis is one of the highest-value applications of AI within legal operations. E-Billing systems have already done the heavy lifting of aggregating billing data. AI unlocks additional value by normalizing data, classifying legal work, identifying anomalous spend, forecasting future costs, and providing fast answers to budgeting questions without requiring every stakeholder to be a specialist in analytics.

With the right tools in place, budgeting changes from an annual exercise to an ongoing strategic capability. Legal operations teams that combine clean data, disciplined matter management, strong outside counsel controls, and AI analysis will be able to forecast costs, justify investments, negotiate future engagements, and demonstrate the legal department’s business value.

The Time Is Now

A legal department does not need a perfect data environment to start improving its budget process. It needs a strategic way to organize spend data, ask better questions, test assumptions, and convert insights into specific decisions. AI plays an invaluable role in making data-driven decisions so teams create a more defensible budget and a clearer path to savings.

If your legal department does not have access to the tools to enable your budget cycle with AI, learn more about how Epiq Legal Spend Management supports your team here.



Peter Eilhauer, Managing Director, Legal Operations Solutions
An executive with over 20 years’ experience in the legal industry, Peter works with corporate legal departments, law firms, and insurance companies to reduce costs and improve operations through spend analysis, process improvement, and workload optimization.