Act I · Chapter 10
Once it is software: when a converted firm crosses into Act II, and what changes
The bridge chapter. Act I converts a services firm. Act II is the forty-eight levers of the software edition, carried with their sources, because a converted firm has a software company's problems. This chapter sets the thresholds for the crossing and maps the hand-offs so that a register can run continuously from close to exit.
Act I · Chapter 10 of 12Once it is software5 min
The thresholds
A firm has crossed when its scorecard says so, on four lines together, for two consecutive quarters:
| Scorecard line | Crossing threshold | Why this line |
|---|---|---|
| Recurring revenue share (by contract) | Above 65 percent | The majority of the book renews rather than re-sells; a software buyer's first filter |
| Gross margin | Above 55 percent | Delivery is platform-led; below this the firm is a services business with good tooling |
| Revenue per delivery FTE | Rising for four consecutive quarters | Growth has decoupled from headcount, measurably |
| Error rate on platform-delivered work | At or below the manual baseline | Quality held through the conversion; liability did not rise |
The thresholds are the playbook's proposal, not a market standard; they are set where the Act II levers start to apply and where, in the exit chapter, a software strategic would begin to price the firm on revenue. A firm's board may set them higher. It should not set them lower, because crossing early means running software levers on a services P&L, where they mostly do not apply.
What changes when it crosses
The problems change, and so does the evidence base. Act I's evidence was thin because the conversion is new. Act II's evidence is the software edition's: pricing and packaging, support resolution, finance close, cloud waste and the valuation arithmetic rest on filings, statutes, independent studies and large samples, and the chapters say which figures did not survive checking. A converted firm inherits that evidence, and it inherits the software edition's four conditions as a subset of Act I's five.
Three problems arrive with the crossing.
Pricing tiers meet seat exposure. Act I converted hours to subscriptions. Act II asks what the subscription is priced on. A firm that priced its base tier per user has just acquired the seat-compression problem the software edition describes, and II-R3 (hybrid and usage pricing) is the lever. Most converted services firms price per entity, per filing or per program rather than per seat, which avoids the problem; the bridge is the moment to check.
Inference cost meets the margin it created. D7 managed platform cost per unit. II-G5 manages it as a share of a software gross margin, with the software edition's warning that an 85 to 90 percent gross margin claimed by an AI product is a flag, not a boast. The hand-off is direct: D7's cost-per-unit series becomes II-G5's baseline.
G&A moves from a services shape to a software shape. O10 took overhead toward the first quartile from a services starting point. II-O14 does the same from a software one, where the benchmark is different because S&M is a real line now (R7 built it). The register continues; the comparator changes.
The hand-offs
Every Act I lever with a continuing life in Act II hands its baseline, its owner and its register history to the Act II lever that takes it over. The IDs below are the software edition's, prefixed II- so that a citation is unambiguous.
| Act I lever | Hands off to | What transfers |
|---|---|---|
| R1 Pricing model conversion | II-R1 Price and packaging; II-R3 Hybrid and usage pricing | The tier structure and price list; the question of what the subscription is priced on |
| R2 Platform-delivered service line | II-R2 The AI-paid product | The line becomes the product; the twelve-month condition becomes the software edition's "paid product inside twelve months" |
| R3 Scope expansion | II-R4 Expansion and cross-sell | NRR history; the scope map |
| R4 Book retention | II-R5 Retention | Client-level baseline; the targeting rule continues unchanged |
| R5 Throughput as revenue | II-R6 Win rate and cycle time | Cycle-time series |
| R6 Down-market entry | II-R11 Self-serve conversion | The base tier becomes the self-serve funnel |
| R7 New-client acquisition | II-R7 Demand generation after search | CAC baseline; the headwind evidence |
| R10 Data products | II-R10 Data products | Consent share (X3) as the gate |
| R11 Premium human tier | II-R1 (top tier) | The named-senior tier becomes the enterprise tier |
| D1 Work-unit automation | II-G1 Support resolution; II-G2 Onboarding and implementation | On-platform share and error rate; the review model becomes the resolution-quality control |
| D2 Delivery pyramid | II-G6 Cost to serve | Span of review becomes the cost-to-serve ratio |
| D3 Review and QA | II-X2 AI governance and product liability | The sampling plan and error series become the governance program |
| D4 Knowledge capture | II-X3 Data governance and rights | Frameworks become the product's data model |
| D7 Platform and inference cost | II-G5 Inference cost management | Cost per unit series |
| D8 Utilization to throughput | II-O13 Executive operating system | The metric change is complete; the register continues |
| O7 Partner compensation | II-O13 | The formula persists; partners are now executives |
| O9 Executive operating system | II-O13 | The same register, continued |
| X1 Professional liability | II-X2 | Claims log |
| X3 Data governance | II-X3 | Consent map |
| X4 Security posture | II-X1 | Certification |
| X6 Exit readiness | II-X6 | The exit scorecard, now with the software edition's multiple evidence |
| B2, B3 Integration and standardization | II-X4 Add-on integration | The integration template; add-ons are now software add-ons as well as services firms |
| B5 Pacing | II-X5 Continuous diligence | The pacing rule continues; the data informing it is now the platform's |
Act I levers with no Act II life (P1 to P9, D5, D6, C1, C3, X2, X5, B1, B4) are closed on the register at the crossing with their final outcome recorded. They are not deleted; a buyer at exit will want to read them.
What a firm looks like on the other side
It has a price list, a product a client can see, a review model an insurer has read, a finance function of a few people, a G&A line that is measured against software companies, a marketing function that did not exist three years earlier, and a partner group that is paid on retention, quality and the exit. It still has the relationships, the method and the domain knowledge it was bought for, and the people who hold them are in the premium tier. It is, in the software edition's terms, a vertical platform that holds its customers' compliance, tax, legal, engineering or billing data and can sell the labor around that data as product. That is where the software edition's Invent horizon begins, and it is the most durable outcome this playbook describes.
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