Countdown to millennium crisis

I was asked last week what I thought the cause of the next recession would be. The cyclical nature of economies suggests that there does not necessarily have to be a particular cause, although that w ill not stop people looking for one. I do, however, believe that the so-called "millennium bug" is likely to have a major impact.

The millennium bug is shorthand for the problem caused by the fact that most IT systems run on software which was written in such a way that only two characters are used to represent each day, month and year, as in 16-12-97.

In such systems, the year 2000 will be represented as 00. IT systems with the millennium bug will be unable to distinguish between 1900 and 2000, and may simply read the 00 date as an error.

In February, the then Science and Technology Minister Ian Taylor said UK companies faced a big bang of crashing computers that could bring their businesses down if they failed to act straight away.

Commenting on the results of a survey published by Taskforce 2000, the group set up by the Department of Trade and Industry to raise awareness of the issue, Taylor said: "This survey shows that fewer than a third of senior managers are fully aware of the problem and only 9 per cent of organisations have audited their systems to discover the extent of their exposure."

His opinion of the seriousness of the problem is shared by a number of major companies, which are insisting that their suppliers ensure their systems are year 2000-compliant. In some cases they are refusing to deal with suppliers unless they show that they have taken steps to resolve the problem.

While it is fair to say that most of the major corporations have addressed the problem (and in some cases insisted that their suppliers do the same), only a small minority of companies have undertaken a detailed audit of their systems or made provision for the cost of putting them right.

Time is running out, if it has not already run out. Leading accountancy firms are now refusing to sign unqualified audits without confirmation that the relevant company is year 2000-compliant.

The costs of dealing with the problem are extremely high. A study published by BZW at the end of 1996 estimated that the cost of dealing with the problem worldwide could be £30bn, with European companies alone spending as much as £10bn.

Other, less conservative, estimates put the worldwide cost at between $400bn and $600bn. The major clearing banks are already estimating that the cost to them will be £100m plus. If anything, these costs are likely to increase.

All organisations share the same immovable deadline which takes no account of the size of the task. This is inevitably resulting in shortages of the skills and resources required to deal with the problem, which in turn pushes up the costs.

The costs of dealing with the problem in advance are relatively small when compared to the losses which may be incurred if organisations do nothing. For example, a computer in New Zealand was programmed in such a way that it failed to take account of 1996 being a leap year. At midnight on 30/31 December 1996 it closed down the Tiwai Pt aluminium smelter because it could not handle the 366th day of the year. The loss amounted to £500,000m.

Losses like these also mean litigation and the heavy costs associated with bringing proceedings. An article on the Internet claims that Lloyd's estimates that lawsuits arising from the year 2000 issue will top $1 trillion in the US alone.

The effect of the problem on businesses that have not got round to addressing it will naturally vary from almost negligible to catastrophic, depending on the company and the size of the problem.

Looking optimistically at the potential impact, if we assume it will significantly affect only 10 per cent of those organisations that have not conducted an audit, it will still have a major impact on the economy.

Year 2000-compliance is a major problem for most organisations. It is expensive to solve but potentially disastrous to ignore. Time is running out, resources are scarce and lawyers are already looking forward to a steady stream of new claims. The big corporations may be on top of the issue, but there will inevitably be business casualties.

One prediction I am prepared to make is that the run up to the year 2000 will be the start of a busy time for insolvency practitioners and their lawyers.