YEAR 2000 CHALLENGE: Countdown to Rollover

YOU’RE DONE. YOU’VE FOUND and fixed the date fields, installed the new software and filed compliance letters from your suppliers. You’ve put contingency plans in place, documented all remediation efforts and held meetings with the company lawyers. But, still, are you ready? And if you are ready, are the other companies on which you depend ready? And will your customers act rationally?

On an individual company basis, the answers depend on myriad issues, including the age of the software code base, the diligence with which the Y2K problem has been attacked, the skills and methods of those addressing the problem, and, yes, probably a little luck. But on an aggregate basis, U.S. businesses look well prepared. What’s more, that preparation will pay off.

These are the key findings of a research project currently underway at International Data Corp., a market researcher based in Framingham, Mass., and a sister company to CIO Communications Inc. Known as Project Magellan, the effort captures years of IDC research surveying IT professionals and CIOs on their Y2K remediation efforts. In the project, IDC uses its global research data to forecast the impact that the millennium bug will have on the economies of more than 50 countries, countries where most multinational companies do business. The outlook is not pretty. (For more information, see “Globetrotting with Project Magellan”.)

But first, the good news. In the United States, we are well prepared. In the last five years, U.S. businesses have spent $109 billion to fix the Y2K problem. And this includes only spending on staff, software, hardware and services targeted specifically to Y2K. It excludes normal product upgrades or enhancements, unless they were rushed into place more than six months early.

As a result of that spending, 85 percent of the more than 1,000 companies responding to a recent IDC survey said they had completed Y2K remediation by Sept. 30; less than 3 percent expected to miss the deadline. Even better news:

Large companies with complex environments were even further along and had conducted more extensive testing. You have done your homework. Good job.

Now the Bad News

That might be the end of it if many of us didn’t work for international or global organizations. Here the story is a little different. While countries outside the United States have spent some $149 billion to fix the Y2K problem, as a percentage of their overall spending on information technology, they have spent considerably less than our country has spent. We compared the relative spending in 1999 on fixing Y2K bugs in seven major regions of the world and found that the United States spent more last year to fix Y2K problems than it did this year and spent the same amount in 1997 as it did in 1999. Not so in other regions.

In Western Europe, for instance, corporations have spent only 60 percent as much as their U.S. counterparts on fixing the problem when measured relative to IT budgets. Even lower on the charts were developing regions like Latin America (18 percent), Eastern Europe (16 percent), the Mideast and Africa (26 percent combined). Asia-Pacific’s figure (62 percent) would look worse, except that that number represents only 1999 spending, and the region, particularly Japan, has been playing catch-up.

Particularly worrisome, as other studies and government advisories have pointed out, are activities in developing countries. In a global survey of 15,000 businesses around the world early in 1999, the Project Magellan team found that over 90 percent of the companies surveyed in the developed world expected to be done with Y2K remediation by the new year. In the developing countries, that percentage was just less than 20 percent. In addition, more than 25 percent said they didn’t think they had a Y2K problem to begin with. If you are running a multinational with remote offices, you already know the rest of the world is not as prepared as the United States.

What no one has done until now, however, is quantify what this means. We know how much work we’ve done to fix Y2K. Will that work pay off? What will be the impact of Y2K? Will, for instance, Deutsche Bank economist Ed Yardeni’s prediction that there is a 70 percent chance that Y2K will cause a global recession come true? Or will Y2K blow over as calmly as did Sept. 9, 1999, the global positioning system 20-year date rollover and the U.S. government’s new fiscal year?

The Metrics of Pain

How much pain will the Y2K bug inflict? The researchers and economists on Project Magellan puzzled first on how to measure its impact on the economy. When all was said and done, the simplest way seemed to be in revenues lost as a result of downtime. These would have to be revenues that weren’t just shifted from one company to another, or from a week in January to one in February, and so on. But they could be, and will be, revenues lost throughout the year, not just in the first days of the year 2000.

Using the results of several major research studies, ongoing information on automation levels and IT budgets in different countries, the Project Magellan team developed a model for the impact of Y2K. Out of this model came three scenarios that varied based on how Y2K problems are likely to travel through the economy. In the Ho-Hum Scenario, problems are relatively well contained and the effects are isolated to individual companies. In the Cascade Scenario, lost revenues cascade through the economy similar to the way value-add is developed in the economy. One company’s lost dollar is another company’s lost 70 cents. Problems diminish as they propagate from company to company. In the Cascading Cascade Scenario, lost revenues filter through the economy twice as far as they did in the previous scenario. But problems’ effects ultimately dwindle. One company’s Y2K problems—especially in billing and supply chain systems—affect seven other companies before petering out.

A fourth scenario not computed in the model might best be termed the “civilization ends as we know it” scenario. This is the one where problems propagate through the economy and get worse as they go along—one company’s dollar of lost revenue is another’s lost $10 and so on. The Project Magellan team considers the probability of this to be so remote that it’s not even worth calculating. In this scenario, CIOs would have been better off spending their Y2K remediation dollars on lottery tickets.

Was It Worth It?

Based on our research, IDC believes the Cascade Scenario will prevail. If so, the world economy will lose $19.2 billion to Y2K bugs in the year 2000, a pittance compared with the money spent fixing the bugs and on the overall world economy, which is measured in the tens of trillions of dollars. (The more drastic Cascading Cascade Scenario would take more than $60 billion out of the world economy, still a small amount on a global scale.) Losses by region fluctuate. Despite the work done to date, the United States has such an automated economy that what few problems are left will have more impact than problems in less automated economies (total: $4.9 billion). Latin America’s Y2K losses will outstrip its share of total IT spending by a large margin ($1.2 billion).

An older software base and fairly automated economies in Japan and Australia drive the Y2K losses in Asia-Pacific ($7.4 billion) past those of the United States, accentuated by the prevalence of pirated software in the lesser developed Asia-Pacific countries. Y2K problems in Eastern Europe ($1.1 billion), especially Russia, which are expected to be widespread, will be offset by the fact that most of the local economies are not dependent on computers.

The 10 countries of the 50 largest that will be the most affected by Y2K as measured as a percentage of their economies include Bulgaria, Hong Kong, Japan, Korea, the People’s Republic of China, Portugal, Romania, Russia, Taiwan and Vietnam. Note, however, that even in the countries hardest hit, losses will be less than 0.1 percent of the year 2000 economy.

If the Project Magellan forecast comes to pass, you’ll soon be breathing a sigh of relief. Staff will be taking comp time, and vendors will be beating down your door to discuss new projects. The Y2K problem will fade, no worse a memory than a major operating system upgrade from the IBM System 360 to the System 370 was in the old days. In fact, more than likely there will be questions on whether the whole Y2K “scare” was justified. That’s the irony of it. The more smoothly we enter the next millennium, the more that management, pundits and the public will second-guess whether the last five years of remediation were worth it.

Once the final impact is tallied, the Project Magellan team will turn to its Y2K impact model to run ROI calculations. In a first pass, the team determined that if the scenarios don’t change—just the number of bugs and the time to fix them—then all the money spent to fix Y2K will be matched by revenues that could have been lost but weren’t. Fixing Y2K bugs then was an insurance policy, with some side benefits triggered by the system upgrades required.

But quite likely, if no Y2K efforts had been undertaken, then we would be favoring a different scenario, one where problems compound one another in accelerating fashion. In that case, we wouldn’t just be looking for jobs after Y2K. We might be looking for food, gasoline and batteries.

John Gantz is chief research officer for IDC in Framingham, Mass. He can be reached at jgantz@idc.com.