Y2K Business Impact Assessment and Implications
An Analysis of
Government Documents, News Reports and other Information on Potential
Y2K Business Disruptions
Prepared by
The Institute for Crisis Management
May 7, 1999
I.Introduction
The amount written about the Y2K computer problem in the past 12 months could well be approaching the number of lines of date-sensitive computer code that have to be remediated to avoid Y2K computer problems. Those written assessments thus far of the Y2K problem have run the gamut from one extreme to the other.
"The day the world shuts down."
-NEWSWEEK
"...the biggest fraud perpetuated by consultants on the business community since reengineering."
-Reader's Digest
The truth is that the accurate assessment of Y2K is somewhere in between. Unfortunately, while the totals for the lines of computer code to be remediated will stay basically the same, the volume of news reports and ensuing concerns among all segments of the public in the U.S. and abroad has accelerated rapidly since the beginning of 1999 and will continue to escalate. We anticipate that coverage and resulting concerns will grow exponentially as January 1, 2000 approaches.
The following is ICM's assessment of the potential Y2K business disruptions, based on the current information available. It was compiled from several thousand news reports and Internet documents as well as other research including anecdotal information. The most important of these documents is the report of the U.S. Senate Special Committee on the Year 2000 Technology Problem released in March 1999 and based on its hearings and research during the second half of 1998.
The lack of reputable information and the conflicts in the information that is available are two major issues that prevent an effort such as this from succeeding at a level of certainty that both ICM and its clients would want, given the potential impact of Y2K business disruptions. Those who have examined the Y2K problem come away with one overriding impression--The utter lack of reliable, timely information. From the Gartner Group to InfoWorld to the Senate Y2K Committee, the plaintive cry of "we really do not know what is going to happen" has been heard.
This problem exists for a number of reasons, not the least of which is the litigious society we live in. Companies are afraid that if they say they will be ready for Y2K and they are not, they will be sued by shareholders. Yet, if these same companies admit that they are probably not going to be ready, their stock value will drop now and their customers and suppliers will abandon them or file suit. In all events, the owners and managers of companies and institutions feel trapped no matter which approach they take--candor or concealment.
We know this situation will change as the year progresses and more forthright information becomes available. The SEC reports in the fourth quarter 1999 on Y2K preparedness should be a watershed as publicly owned companies share the final assessments of their IT staffs on the actual levels of preparedness they will have achieved by January 1st. ICM will continue to monitor all of the relevant sources of Y2K information and will adjust our assessment of the possible impact that Y2K will have on business and governments worldwide.
II. Basic Assumptions
In spite of the above problems, a number of basic and relevant assumptions have emerged from our analysis of the business disruptions that may be triggered by Y2K computer problems.
The Y2K business impact will be two-tiered:
Tier 1Ñthe businesses and government agencies in the U.S. and Canada, which have taken Y2K seriously and invested heavily in remediation. Their massive expenditures will give them the best chance of getting through Y2K with minimal disruptions. Where problems do occur they will be the organizations most likely to have business continuity plans to deal with them most effectively.
Tier 2Ñthe rest of the business world as well as government agencies and non-profit organizations that lack the resources to be sufficiently prepared for Y2K disruptions. They will be much more vulnerable and take longer to correct their Y2K problems, since they often have limited computer staffs or rely on outside vendors. The problem is that many Tier 2 disruptions will percolate up and impact the Tier 1 companies that rely on these organizations as suppliers of goods and services or as a major segment of their customer base.
The most serious Y2K problems will be in date-sensitive semiconductors
The innocuous embedded chips used throughout the oil industry, for example, are likely to trigger higher gasoline prices in fourth quarter 1999 and first quarter 2000 when the three top oil exporters to the U.S. disclose they may be unable to keep their petroleum shipments at the current levels. The Senate report indicates that Saudi Arabia, Kuwait and Venezuela, that account for nearly half of the U.S. oil supply, are 12-18 months behind the U.S. in Y2K remediation of their oil fields, refineries and pipelines, all of which make extensive use of embedded computer chips. Other Y2K problems are expected to impact oil tankers, especially when they are in foreign ports to be loaded.
Sales and overall profitability of retailers worldwide will be affected by the millions of computerized POS (Point-of-Sale) machines that serve as cash registers but also provide essential sales and inventory data. Many types of POS machines have semi-conductors and/or software that are not Y2K compatible. With the massive number of computerized cash registers in use, it is not difficult to visualize the impact on retailing of employees having to calculate a customer's change, or record the store's sales and inventory data.
Some Y2K semi-conductor problems will be more serious, even lethal. Tens of thousands of heart monitors, kidney dialysis machines and other types of life-saving equipment with semi-conductors that may fail to work properly in the Year 2000 are still being used in hospitals worldwide, especially in more remote areas
Y2K problems in the U.S. and Canada will be a drop in the bucket compared to the rest of the world. Most overseas nations are a year or more behind in their Y2K remediation efforts. Many will be hard hit by Y2K problems involving utilities, financial services, transportation, retailing and healthcare delivery, which, in turn, will affect other areas of their economies. The only mitigating factor is that these countries are more accustomed to these types of disruptions than the U.S. and should therefore be able to adapt and adjust their business activities more easily.
Most government agencies are behind the curve in their Y2K preparations, and will be primarily reactive rather than proactive in their response to disruptions in 2000. The Tier 2 principal will apply with many state/provincial and local government agencies in more Y2K trouble than the federal government.
In both instances, rather than leading the public and business sectors to prepare for Y2K, most governments evidently are planning to react once the problem erupts. This response will be in terms of police efforts, relief programs, and rushed-in-place legislation. Overseas, the lack of Y2K preparation could result in near-paralytic conditions in the government agencies of many countries as well as in their banking systems, transportation networks and social infrastructures.
The news media is in a costly Catch-22 conundrum. With all of the costly problems associated with Y2K, and the growing uncertainties as January 1st approaches, the Y2K bug is a natural ongoing story for any news organization. Both the print and electronic media recognize this and continue to increase their Y2K coverage.
- The dilemma for the corporate executives of the media companies, and the management of their news organizations, is how their readers and viewers will react to the continuing Y2K media barrage as the year progresses. With all of the negative coverage offset by hollow assurances of being ready for Y2K, expectations are growing that consumers will take an increasingly cautious stance in their investment and buying decisions in the second half of the year.
The result could well be a sharp decline in sales big-ticket items like cars, homes and vacations during the second half of the year, and much more conservative buying during the Holiday Season, all of which will have a distinct impact on advertising revenues. Corporate executives at Walt Disney, which owns ABC, General Electric, the owners of NBC and TimeWarner, the owners of CNN, will have a real predicament on their hands. Where do they draw the line between covering the news of Y2K and protecting the financial side of the business.
III. Y2K Impact On Industrial Sectors
A. Utilities
Only about 50% of utilities had completed remediation and 36% had completed testing by December 1998. Most large utilities have made and are making significant progress, but many small and rural utilities, especially the coops, are not going to be ready. Nuclear facilities overall are lagging behind other electric facilities in their assessment and remediation efforts. The three outside sectors that electricity is most dependent on Ð telecommunications, rail, and natural gas/oil supplies Ð seem to be making fairly good progress in Y2K remediation. The problem is that the major electrical utilities in North America are interconnected through a national grid, divided into three sections. There is no body of knowledge on the impact on the grid of multiple failures across the grid. Based on past outages in sectors of the grid, it is known that service disruptions can domino, causing failures in areas far removed from the original problem. There is also no body of experience on restarting the grid if it should fail completely, since it has never happened. Therefore, some of the larger utilities with capabilities from production to distribution to delivery are developing contingency plans to remove themselves from the grid if necessary.
B. Oil & Gas
The oil and gas industries are behind other segments in their Y2K work, and will not complete repairs of all its systems in time. The biggest concern is among the numerous independently owned and operated petroleum refiners, distributors and retail suppliers as opposed to the major oil companies which have invested hundreds of millions of dollars in Y2K remediation. Another source of concern is the thousands of miles of oil and gas pipeline where product flow and other key measurements are controlled by embedded chips, most of which will not be checked in time.
The possibility of cutbacks in imported oil during the first quarter 2000 and the resulting increases in prices at the gas pump will seriously impact any business in which large numbers of vehicles are used.
C. Financial Services
The Federal Reserve, SEC and their counterparts throughout federal and state governments have made Y2K a top priority, often backing their requirements with possible legal consequences. As a result, the financial services sector as a whole is well on its way to being prepared.
On the other hand, the financial services sector is also one of the most highly interconnected sectors, and is extremely dependent on computer technology. Computer failures or Y2K software problems that corrupt data can ripple through the system in a matter of hours, and may not be caught for weeks. We expect more than one bank will find its monthly check account statements for its clients will have errors that will have to be rectified.
Regardless of the financial services sector's actual readiness, consumer confidence will have as much impact on the industry as actual Y2K problems. If the public perceives a problem and begins pulling out its assets, this can become a self-fulfilling prophecy. As a result, the entire financial services industry has adopted a standard "we're fine and going to make it" message, thus making it difficult for consumers to know for sure what actions to take to protect their money.
Anticipating possible consumer actions, the Federal government has already planned an increase of billions in the money supply for the month of December 1999, so that member institutions will not run out of cash as depositors withdraw funds "just in case.Ó This in itself is an indication to many consumers that there may be financial problems.
The stock market and securities industry was supposed to be carrying out end-to-end testing during the spring of 1999. While there has not been much public reporting on this testing, one insider has reported that the testing is not going well. It has not been possible to confirm this report. Neither has there been any public reporting to refute it or to indicate that all is well.
Once again the most serious Y2K problems in financial services are likely to be seen in many international countries where the banking and electronic funds transfer systems will not be fully remediated before the end of the year. The Y2K readiness of the stock markets overseas at this point is unknown.
D. Telecommunications
Much of the equipment used to provide telecommunications capability is not date-dependent and thus does not have a significant Y2K problem. The remainder that is has largely been tested and either passed the tests, has been remediated, or has been replaced. Most telecommunications providers are fairly confident of their ability to provide service in 2000 and beyond. There is less confidence in the business systems, such as those used to track and generate consumer billings.
With the growing use of analog, digital and now even satellite telephones, voice communications problems should be kept to a minimum if Y2K disruptions affect normal telephone service. Data transmission from multiple locations such as individual stores to the corporate offices will be more of a problem in these instances, and could be a serious concern in some overseas countries.
E. Transportation
Individual transportation vehicles (planes, trains, and automobiles) are, by and large, compliant. Planes will not "fall out of the sky,Ó nor will cars refuse to start.
On the other hand, there is widespread uncertainty about the ability of support systems to function. These would include such systems as the FAA's air control system, scheduling systems for large trucking firms, and reservation systems.
There are numerous dependencies throughout this sector that may not be readily apparent. One official has claimed, for example, that a single pipeline supplies aviation fuel to most of the airports along the East Coast. If that pipeline were to fail, New York airports could only operate four to seven days with the fuel on hand. There is a widespread lack of contingency planning as reported in various surveys.
A major area of concern is public transportation, as the majority of governments are not at all ready to deal with Y2K. In addition, the indications are that some public transit systems may not be taking the problem seriously enough to be ready, which could affect the ability of thousands of employees in the affected metropolitan areas to get to and from their jobs.
F. Government
The Y2K readiness and compliance of federal, state, and local governments is, to coin a phrase, all over the map. Certain agencies and governments are already compliant, while others have barely begun. There is inter-agency coordination, but it too is very spotty. While it is beyond the scope of this document to delineate the status of all possible governmental agencies, certain key facts can be identified.
There is little doubt that various governmental services will be disrupted as a result of Y2K issues. It is not possible, due to the lack of firm data and the natural reticence of politicians to share bad news, to know with certainty which ones will be affected.
The Y2K problem for the Federal government is mind-boggling, simply due to the size of the government and the inter-relationships of the various agencies. However, based on the ratio of problem size to money and resources available to deal with it, many state county and city governments have just as big a problem.
Several cogent statements from the Senate Report are enlightening:
"As expected,
those that started the earliest generally lead the pack. The Social
Security Administration and Small Business Administration are notable
agencies in front that started in the late 1980s."
"The Committee
is very concerned about current agency progress. Despite an apparent
increase in activity, it is still not enough. Many schedules show
a steep improvement curve just before key OMB milestones."
"The federal
government has never received a passing grade on any of the six report
cards issued by Congressman Stephen Horn."
"Problems
with federal systems combined with Y2K failures in state and local
government systems, or the interfaces between them, could result in
delayed benefit payments, payments not being received at all or delivered
to the wrong party, eligible recipients not receiving payments or
incorrect amounts disbursed. Given the extreme volume of transactions
that occur daily to support these programs, a contingency plan consisting
of manual process would not suffice."
"DOD (Department
of Defense) remains behind schedule in completing its systems remediation
and is at considerable risk of being unable to successfully meet the
Year 2000 deadline."
Some have predicted that the problems of the IRS systems will lead to a flat tax. Others predict the welfare system will be redesigned to be a local-government-administered system, based entirely on population count that is federally funded. We make no such forecasts.
What we do believe is that many far-reaching changes will occur as a result of both the failure of government to prepare sufficiently for Y2K disruptions and the failure of certain systems when Y2K problems occur. When the situation is straightened out, we may well see government at the federal, state and local level has been forced to adopt much different ways of providing service than we have become accustomed to in the last 50 years.
IV.
Conclusions
Fundamentally, the larger Tier 1 organizations, with the largest budgets and IT staffs, have the best chances of getting through the Y2K problems with minimum disruptions. In some cases, they started late so a massive effort has been devoted to critical systems and contingency planning. Nevertheless, these organizations will be best prepared for whatever Y2K disruptions impact them directly or indirectly.
Many of the Tier 2 organizations will find they are being buffeted by Y2K and some will be forced to curtail their operations or close for good as a direct or indirect result. Some will be severely affected by the Y2K problems of their customers and suppliers. Depending on the industry and financial strength of the company, they also may be affected by economic factors including increased fuel prices and the possibility of a recession.
Others will be vulnerable to disruptions in government services such as mass transit, police protection and cutbacks in contracts until the agency's internal problems are stabilized. Charitable organizations will be especially vulnerable since many of them count on government funding to help provide
needed programs. That funding may be delayed at the same time these
organizations are faced with increased demand for the services they
provide as segments of the general public are affected by Y2K problems
that have disrupted their normal home life and employment.
Whether they are
Tier 1 or Tier 2, companies, government agencies and non-profit organizations
will have to come up with workarounds before the end of 1999 to overcome
the challenges of Y2K, which in many ways will be the same as those
of a prolonged blizzard. The only difference is that it will be electronic
and the starting date can be predicted.
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