From Skunkworks to Subsidiary: how to make innovation happen at your firm

How is innovation delivered in your firm? This panel takes us on a four stage journey from (1) the solo innovator working skunkworks-style, to (2) the implementation of firm-endorsed innovation incentives, to (3) the funded innovation function and program, and finally to (4) the establishment of a separate innovation/legal tech entity. In addition to describing how to make each stage work well, our panelists will share how they transitioned from one stage to the next and the highs and lows of the journey!

These are my notes from the Strategic Knowledge & Innovation Legal Leaders’ Summit (SKILLS 2021), is a private gathering of large law firms. As with all live-blogging, there will be inevitable errors so please excuse them. My editorial comments are noted in brackets.


Skunkworks innovate under the radar without the heavy burden of bureaucracy. Skunkworks attract the enthusiastic amateur as well as those who just think they know better and can do better.

KM can help by providing support and resources for these solo innovators and small innovation teams. And, when the project is ill-advised, KM can withdraw support and resources. Knowing which projects to support depends on having a structured, strategic approach to innovation for the firm. This helps filter out the potential innovators who are loud and demanding as opposed to those who are quieter but working on more strategically important projects.

Firm-endorsed Innovation Incentives

Firm-endorsed innovation incentives are a way for the firm to back innovation with real muscle. This involves providing “good citizen” or billable hour credit for participating in nonbillable projects for knowledge management and innovation. Create a firm committee to collect, triage/prioritize and then monitor the innovation projects. Invite partners to get involved and even provide oversight for these projects.

Also consider providing cash incentives and competitions to encourage teams to implement, use, and document the results of innovative tools. This will generate helpful ROI data.

Above all, create a community of innovators across the firm. By connecting them, you help provide moral support for them and also cross-fertilize innovation across the firm. This creates a fly-wheel effect within the firm.

Key learning:

  • Make sure you manage and monitor the innovation projects
  • When you get the monitoring data, use them to build momentum and support for increased innovation.
  • ROI can be identified with respect to documented time reduction and efficiency gains.
  • Be sure to publicize the wins. It provides important recognition and reward.

Funded-Innovation Function

A formal innovation function is useful for bringing a measure of structure and discipline to the innovation effort. It helps focus on strategy and outcomes. In addition, it can help guide the creation of an innovation culture within the firm.

To give the function influence within the firm, give it a budget of dollars and a budget of billable hours to be allocated to lawyers involved in innovation projects.

In terms of staffing, considering hiring an innovation solutions architect with strong analytical capabilities. Another potential source of staffing is the group of professional support lawyers who may be looking for new ways to demonstrate their value to the firm.

Connect the innovation effort to your learning and development function. In this way, you can embed innovation in the most recent hires and then reinforce this throughout their professional development.

Innovation Subsidiary

To the extent that there is a “journey” through the innovation stages, it does not need to end up in a subsidiary. That said, an innovation subsidiary that is wholly-owned by the firm can provide real benefits.

A fully built-out innovation platform needs three horizons: (1) how to make today’s practice of law more efficient. This deserves about 70% of your attention and effort. (2) how to create new revenue for the firm. This deserves about 25% of your attention and effort. (3) seeing the next new thing before it hits you. To do this, invest in identifying the model that will break the current model. This may mean simply monitoring developments; for other firms it may mean shaping the new model. This deserves about 5-10% of your attention and focus.

The benefit of creating a wholly-owned innovation subsidiary is that you can focus on creating and then developing products and services in a disciplined fashion. Above all, the subsidiary can create and sustain an effective marketing and sales channel. (Law firm partners are too expensive to work on lead generation and customer calls.) Introducing a different way to market products has been a real benefit to the subsidiary and its affiliated law firm.

If you need to bring in specific legal expertise from your affiliated law firm, you will have to compensate them. Sometimes, compensation is in the form of billable hours. Sometimes it is in the form of a success fee.

Why choose a separate legal entity? Running a startup company is very different from running a traditional law firm partnership. It is very hard for a start-up to predict its revenue — particularly in the absence of historical data. This makes many lawyers extremely uncomfortable. In addition, some regulatory frameworks frown on law firms providing non-legal advice, products, and services.

Main lessons learned:

  • Stay close to the client and let client demand drive what you build. Ask the client — they like to be asked.
  • Listen to the partners — but only to a reasonable extent. They know the law but do not know marketing.
  • Never build a product without partner support.
  • Say close enough to the firm to maintain firm support.
  • Stay nimble — don’t get bogged down in red tape.
  • Stop giving things away for free. If you have “free stuff,” make sure you understand the benefits to the firm and to the client.
  • Finding new sources of revenue for a firm is a critical part of a fully built-out innovation platform.

[Photo Credit: Johannes Plenio]

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