Law firms are facing some challenging headwinds. Demand for legal services has been sluggish at best recently (PDF) while rate pressure from clients and rising headcount and expenses are pressuring profitability.

As a result, some firms have begun re-thinking their traditional models for delivering legal services and have launched innovative initiatives to better position themselves in the market both now and in the future. Here are two key trends that are gaining traction:

New Approaches to Expense Management

A growing number of firms are moving parts of their support and other functions, both offshoring to India and the Philippines, as well as “onshoring” to lower-cost domestic locations and away from high cost centers such as New York and London.

Typically, these “remote” operations begin as centers for back office administrative and support functions, but often quickly grow to include a wide variety of other activities, including litigation support, basic document drafting, and some legal research.

Similarly, legal processing outsourcing (LPO) is experiencing rapid growth, and providers are opening onshore centers in the U.S. to augment their foreign operations. Typical work includes litigation support, review of basic corporate documents, risk management activities, and IP-related research.

Experiments with New Business Models

“Project management” is an increasing buzzword in legal circles. But while some lawyers may fret that it will turn them from barristers into paper-pushing project managers, it’s really an approach to redesign legal work processes to achieve greater efficiency and cost-effectiveness in the delivery of legal services.

A number of firms have instituted project management training for their lawyers and providing partners with tools necessary to budget and track projects effectively. Other firms are redesigning work processes by reexamining the mix of professionals — both lawyer and non-lawyer, in-house and outsourced — needed for certain kinds of work and the technology and knowledge tools required to support them.

Expanding Merger and Lateral Activity

Despite the slow economy (or, in some cases perhaps, because of it), law firm mergers rebounded strongly in 2011, with 45 completed mergers last year involving U.S. based firms, a 67 percent increase over 2010, according to a recent MergerWatch report. While firms appear to remain somewhat cautious about large combinations — often preferring regional tie-ups — merger activity appears to be heading back towards pre-recessionary levels when we typically saw 55+ mergers per year.

At the same time, we have also seen a shift among firms toward lateral acquisitions as a means of expanding equity partner ranks as opposed to a primary reliance on internal promotions. Within the last two years, there has been a clear shift toward more reliance on lateral partner candidates.

Facing an uncertain picture for the direction of the economy and pressures on rates, costs and profits, firms that are willing to take risks and explore new approaches and models may be primed to achieve greater success in a rapidly evolving legal marketplace.

Mark Medice is program director of Peer Monitor