An Overview of Y2K Concerns

It's official: Y2K isn't a hoax designed to sell computers. There's no conspiracy, and it's not the end of civilization.

Since April 1998, the U.S. Senate Special Committee on the Year 2000 Technology Problem has conducted hearings and investigations. The recently released Report, "Investigating the Impact of the Year 2000 Problem," is the most comprehensive federal government report yet. Although the Report concluded by suggesting more investigations are necessary, it still provides an excellent source to identify key sectors of the U.S. economy that are exposed to Y2K problems.

Y2K problems exist because some computer systems and microchips recognize only the last two digits of the year. When the year changes, they will mistake the Year 2000 for 1900, and systems may malfunction or fail. This could seriously disrupt portions of our economy, unless problems are fixed.

The Report (located at http://www.senate.gov/~y2k/) addressed seven critical economic sectors. This column summarizes the Report. If you find the scenario getting worse as you read from Sections 1 through 7, it's because we've organized it from "best" to "worse" sectors (reading it backwards will not necessarily make you feel better).

1. Banking and Finance

You'll be pleased to know that banking and financial services rank ahead of most other industries. Federal regulators have overseen banks to make sure they're prepared. Your ATM will probably work - so long as it has money. The Federal Reserve figures that every U.S. household will withdraw an average of $500 in anticipation of Armageddon. If you're wondering about your stocks, the securities industry overall is undergoing extensive and successful Y2K testing. From a purely technical standpoint, the markets will probably be open. This doesn't address problems such as unusual trading behavior and international financial pressures which can affect the markets. Publicly traded companies are required to disclose Y2K problems to shareholders, but most have been reluctant to make clear statements. Statements have been effectively watered down to limit exposure to liability or stock volatility. You can review corporations' quarterly and annual reports at the U.S. Securities and Exchange Commission's Web site (www.sec.gov/edgarhp.htm).

2. Telecommunications

We depend on the critical telecommunications infrastructure. The failure of AT&T's frame relay system in April 1998 and the loss of PanAmSat's Galaxy IV satellite in May 1998 was disruptive for the millions of customers who were affected.

The Committee Report suggests that at least one of your phones might work, at least within the U.S. The telecom industry has spent billions of dollars on Y2K. More than 80% of the public network systems have been tested and are considered "compliant." The Committee is most concerned about international telecommunications traffic. Some foreign governments and companies are still not sharing information, and this could worsen international business and security risks.

3. Government

The preparedness of federal, state and local governments and agencies varies widely. The U.S. Social Security Administration is relatively prepared, but the Departments of Defense, Energy, and Health and Human Services have lagged in some areas.

Despite spending more than $7.5 billion, the federal government won't be able to renovate and test all mission-critical systems in time. Still, the Report states, "wholesale failure of federal government services is not likely to occur."

You might question whether your state is prepared to deliver critical services, such as health and benefit payments. The Committee also reported it's concerned about the ability of local communities to provide emergency and 911 services.

4. Utilities

Will the lights stay on? The Report states that a prolonged nationwide blackout isn't likely to occur, and the Committee doesn't expect the overall power grid to fail - so you can correct the next doomsayer you run into at the cocktail party. However, the Report states "all of the evidence seems to indicate that there may be isolated and diverse electrical outages across the country." When, where, and how long are just a few of the open questions.

The country's electric power industry comprises about 3,200 independent utilities. The industry is configured to handle interruptions. Perhaps the greatest concern is the ability of small, rural electric utilities to pay for Y2K compliance before the clock turns.

5. Transportation

Are you sure you don't want to stay at home? Aviation has received the most attention, although maritime and surface transportation may really be bringing down this sector's Y2K readiness.

The Report states that planes won't fall out of the sky, but disruptions of flights and international transportation will occur.

The Committee interviewed major airlines. All appeared to be managing internal Y2K problems and effectively surveying their external providers. A recent Government announcement said Air Traffic Control, along with its important "HOST" computer system for enroute air traffic control, isn't Y2K vulnerable.

The most serious problems will occur with international air traffic control and foreign airports. Also, airlines are affected by telecommunications; software programs for scheduling maintenance, crews and reservations; and the availability of electricity and fuel.

Travelling on the ground may actually be worse than in the air. The Committee Report states that public transportation systems "may not be taking the Y2K problem seriously enough to be ready for the Year 2000."

And the maritime industry is only "low to moderate" on Y2K awareness. Maritime cargo shipping is unique because each ship is virtually custom-built and must be individually assessed. Some seaports are unlikely to function smoothly. The Report concludes that aggressive action is necessary to avoid global trade disruptions.

6. General Business

Large companies, and heavily regulated industries such as insurance, investment services and banking, are ahead of the pack. In some ways, medium-sized companies may be the worse off. Large companies can pay for the fix, and small companies can get by temporarily with manual operations. But medium-sized companies rely on complex systems, and they're less likely to devote the management and financial resources to become Y2K compliant in time.

Whatever size, your company will lose money from any mission-critical failure. And, it will suffer if its supplier or customer is not compliant. The cost to regain lost operations could range from $20,000 to $3.5 million. Also, it's predicted to take an average 3 to 15 days until lost functions are regained. When it comes to Y2K compliance, the scenario for some businesses is pay now or pay more later.

7. Healthcare

Wishing everyone "a healthy New Year" on New Year's Eve 2000 may be an understatement. The healthcare sector lags significantly in its Y2K preparedness compared to other industries.

Healthcare is highly interdependent and frequently depends on computers for patient care, tests, record keeping, billing and collections. Some medical devices will not function properly after the Year 2000 because they have imbedded microchips that cannot recognize the date change. Also, federal and state medical payments to the elderly and indigent risk being delayed due to Y2K failures.

Many hospitals have been slow to respond to Y2K problems. According to the Report, most hospitals do not plan to test their Y2K remediation even though most experts say testing should be the most important part of Y2K compliance efforts.

About 90 percent of physician offices are unaware of the degree of their Y2K exposure. If doctors think malpractice insurance will cover Y2K, they should carefully review their policies. The insurance industry is publicly stating it doesn't want to pay for losses arising from failures to fix Y2K.

The Impact

Looming over all seven sectors is the prospect of $1 trillion of litigation arising from Y2K-related failures. The Committee Report acknowledges the interdependence of our society: "The result is a litigation domino effect, which allows the Y2K failure of one company to topple all of its business partners."

Congress is hotly debating passage of legislation to prevent frivolous lawsuits and to limit liability. This is drawing fire between political parties, consumer groups and business interests.

Taking remedial steps now is one way you can avoid expensive lawsuits. Carefully consider the technical and legal problems you face, both internally and as they relate to your customers, vendors and suppliers.

Overall, credit is due to the Senate Committee for reporting on the status of these seven sectors. Much of the private sector continues to miss anticipated Y2K deadlines, and some companies still ignore Y2K problems completely. The international implications are frequently overlooked, and the U.S. should encourage Y2K remediation worldwide.

Meanwhile, isn't it nice to know that Y2K remediation is partially in the hands of the federal government? Gulp.