A new report from Fronterion, a legal consulting firm that analyzes emerging trends, points to a problematic 2012 for offshore legal outsourcing, as the industry is likely to see a profitability squeeze.

In the report, the firm tracked 10 trends for the legal process outsourcing (LPO) industry. Among them, the analysis shows that rising wages in developing countries such as India—13 percent in 2011, according to an Aon Hewitt projection—can hurt profitability as a whole, in comparison to the low amount of inflation in the U.S. and the U.K.

Additionally, Fronterion observed a narrowed price gap between offshore legal processing groups and domestic services by contract review attorneys. This, coupled with the projected surplus of law school graduates in 2012, will further hinder legal service outfits, as offshore vendors begin to open domestic sites in cities including Chicago and Washington, D.C., Fronterion managing Principal Michael Bell told the Wall Street Journal.

Despite these possible setbacks, LPOs can look forward to greater expansion in the new year. Fronterion predicts vendors will offer more services beyond litigation support as law firms grow more comfortable with legal outsourcing, as well as technological advancements that offer greater opportunity for LPOs.

Still, LPOs will face more competition, especially from staffing firms, discovery vendors and law firms with their own in-house versions of outsourcing centers. As the industry grows, questions regarding the relationship between the law firm, its client and an LPO must be addressed in 2012.

“While regulators have been slow to offer tangible guidance to legal professionals wrestling with the radical changes reshaping the legal profession, outsourcing will increasingly come under the spotlight in 2012,” the report concludes.