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| The True Cost Of Y2K |
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The Big Picture August 1999 • Vol.7 Issue 8 |
The True Cost Of Y2K Although Estimates Keep Rising, It’s Much More Expensive To Do Nothing | ||
 The anticipated cost of Y2K remediation (the assessment and repair of computers around the world to handle dates after Jan. 1, 2000) has been steadily rising since experts began seriously dissecting the problem several years ago. In 1996, the information technology research firm GartnerGroup (http://www.gartnergroup.com) estimated the worldwide cost of correcting the Year 2000 problem would be about $300 billion to $600 billion. At the time, that amount seemed staggering. Today, it has been revised to $1 trillion or more. Reuters recently reported Jeffery Boonmee, founder and president of Bicom Link, as saying Y2K is now a $3 trillion global industry, and that in the United States alone, the market for Y2K solutions is worth about $800 billion. Boonmee also believes the prices of computers and components needed to cope with the bug will soar this year as consumers rush to fix the Year 2000 problem. The figure keeps rising due to the fact no one has been able to accurately gauge the cost of Y2K repair, largely because there was no way of knowing at a glance where problems would occur. At first, many companies assumed the problem was restricted to "legacy" systems, which are the older mainframe computers used by large companies and schools. Later, client/server systems were added to the at-risk group, especially because they often are involved in complex networking functions. At the time, most companies assumed problems with personal computers would be fixed long before 2000 rolled around as old Basic Input/Output System (BIOS) chips were updated to new Y2K-compliant ones. It was a rude awakening to many that their software and the data it processes was in real danger, as well. So much software is at risk because programmers have continued using two-digit years even after the dangers of Y2K were revealed because they wanted their products to interface with older programs. A final blow came when experts figured out embedded chips also could have Y2K problems. An embedded chip is a very small, very simple computer that is used to maintain date or time calculations in millions of pieces of equipment, from clocks to shutoff valves in electric power plants. Once embedded chips were added to the price tag, the stakes got considerably higher. If your alarm clock fails, you'll go out and buy a new one. If the electrical grid that services one-third of the nation fails, well, you get the picture.  Waiting Proves Costly. There is no precedent for the Y2K problem because never before in history have so many people been so inextricably linked by and dependent upon technology. You can be certain the original programmers who started this mess when they decided to scrimp on disk space had no idea how prevalent computers would become. GartnerGroup representative Bruce Hall made an analogy in his 1997 testimony to the House Subcommittee on Technology and the Subcommittee on Government Management, Information and Technology during a joint hearing titled, "Year 2000 Risks: What Are the Consequences of Information Technology Failure?" "The year 2000 project can be likened to an old house that needs remodeling. We know it's a big job . . . but, we are trying to predict the cost of the job while standing on the curb across the street. If we were able to walk through the house, our estimate would be more accurate, and only by getting in and actually doing some of the work can we realistically tell what we are up against." It may seem amazing that programmers and developers have been stumbling along, year after year, acting as if there would be no year 2000. At some point, someone should have said, "We need to fix this problem now." Unfortunately, technology was developing so rapidly, and competition was so fierce, that information technology managers generally decided to put off the problem. That attitude has gotten us where we are today—in a mad dash to an immovable finish line. It also has made the cost of fixing the problem outrageous. Dollars & Sense. Even if no one yet knows the true global cost the of Y2K problem, we do know some of the hard costs, particularly in the state government sector, where ongoing reporting is required to help keep tabs on both the cost and the progress of Y2K remediation. In addition, banks, Wall Street, and the major industries have been spending huge sums of money in recent years to fix the problem, so we have a pretty good idea of the tab in those areas. Federal Spending. According to an April congressional report issued by the General Accounting Office (http://www.gao.gov), the total estimated cost for Y2K expenses at 24 major federal agencies is about $7.5 billion, more than triple the $2.3 billion estimate from two years earlier. However, every agency is not playing by the rules. The GAO was unable to obtain reports from all of the 41 agencies that receive federal funds. Of 24 agencies surveyed, nine major agencies didn't keep track of Y2K spending separately, three failed to respond to the GAO requests, and five other agencies' figures were combinations of actual costs and estimates of Y2K spending. State Spending. The National Association of State Information Resource Executives (http://www.nasire.org) recently published online the results of an unofficial survey that was issued to state chief information officers regarding their level of Y2K preparedness. See "The United States Of Y2K" sidebar for extracted budget figures and compliance percentages. You can view the entire survey online at http://www.amrinc.net/nasire/y2k. According to a recent report by the U.S. Information Agency (http://www.usia.gov), "a number of states began working on the Y2K problem seriously two or more years ago, and now have considerable experience that they freely share with other states and with the general public, most notably via the Internet." The report names Pennsylvania as having one of the most advanced efforts, and the state is being used as a model for both cost calculations and exposure risk. According to the USIA, Pennsylvania reported all of its thousands of computer systems scattered among 40 agencies had Y2K problems, and at 29 of those agencies the problems were major. The report also says the departments in Pennsylvania requiring the most attention have been those dealing with transportation, labor and industry, and public welfare, and that, so far, the total cost to the state of addressing Y2K problems exceeds $40 million. Even with Pennsylvania's exceptional record—99% of critical systems and 97% of all systems have been corrected—the state still has no way of knowing what expenses may arise as a result of havoc wrought by the date instructions built into millions of embedded computer chips in equipment throughout the state. As a result, the USIA report notes, Pennsylvania Year 2000 coordinator Matt Carey has said the embedded chip problem "could break our back." Corporate Spending. The amount federal and state governments are spending for Y2K correction is eclipsed by what companies are shelling out. According to a survey of U.S. companies conducted by leading information technology research firm International Data Corp. (http://www.idc.com), total Y2K spending by U.S. companies from 1995 through 2001 will be $121.96 billion. Among various industries, spending fluctuates wildly and is again somewhat dependent upon the state of preparedness. For example, the costs for the securities industry, which has basically completed its preparations, have been estimated at $4 billion to $6 billion by Arthur L. Thomas of Merrill Lynch, who heads the Securities Industry Association's Year 2000 Committee (http://www.sia.com). A.M. Best Co. has estimated the Y2K costs for the insurance industry at $6.58 billion as of December 1998. Costs are highest for the small-business sector, which is the furthest behind in terms of Y2K-readiness spending. IDC announced in May that the majority of small firms have yet to undertake a formal assessment of their Y2K compliance. The report stated that small businesses had already spent an estimated $10.6 billion on hardware and software upgrades to help avoid Y2K problems. IDC also estimated as many as 3.3 million firms are waiting until the last minute to prepare for the millennium, and that small firms will spend an additional $6.9 billion before the year ends. According to the Small Business Administration, small businesses represent 99.7% of the employers in the United States and account for 47% of the nation's economic output. As a result, many experts are particularly concerned about problems that may occur if a large percentage of small companies decide Y2K compliance is simply too expensive. (NOTE: The definition of "small business" varies from one industry to another, but in general, it includes those companies with fewer than 500 employees or fewer than 100 for retail establishments.) Among industry giants, the toll is heavy. According to 1997 and 1998 Securities and Exchange Commission filings, Citicorp estimates its Y2K repair costs to be $600 million. Automotive giant General Motors released a slightly lower figure, $565 million, as its projected outlay. The Price Of Failure. The figures we've discussed so far relate to the hard costs of Y2K preparation: software and hardware upgrades and replacement, extra payroll expenses to cover inventory, and other costs associated with the task. But what about the price tag of a lack of preparation? During a congressional hearing in 1997, Hall announced: "GartnerGroup predicts that more than half of all organizations worldwide will not fully complete the year 2000 effort. Once we recognize and embrace this possibility, we begin to alter our thinking in constructive ways." Gartner amended this statement slightly in its report to Congress in October 1998, stating 30% to 50% of companies and government agencies worldwide will experience at least one mission-critical system failure through the first quarter of 2000. The report goes on to predict 15% of U.S. companies and government agencies will experience mission-critical failure. In addition, 10% of these failures will last three days or longer, with the recovery cost from a single failure ranging from $20,000 to $3.5 million. (Gartner's report is available online at http://gartner5.gartnerweb.com/public/static/aboutgg/pressrel/testimony1098.html.) Analysts also are warning that the real "cost" of the Y2K crisis could lie in the public's response to a perceived threat. For example, if investors think the stock market will crash, they may begin selling all their holdings prior to Dec. 31, which may cause a huge market crash. Even worse, if people think their banks will have problems, they may withdraw all their money and damage the country's asset base. To instill confidence in its citizenry, the federal government has mandated that certain federally regulated industries, such as the banking sector, achieve designated levels of compliance. In addition, it has created an extensive Y2K Web site (http://www.y2k.gov), which is packed with information on compliance, threats from failures, and links to other informative sites. Many states plan to run public service announcements prior to Dec. 31 to reassure residents about their safety, and some have announced plans to have their National Guard on alert. The Threat From Without. Experts are now saying that if the United States is exposed to any additional financial risk, it will come as a result of problems in other countries. The Department of Commerce's International Trade Administration (http://www.doc.gov) has issued a report warning that one-fifth of global production involves international trade and could be put at risk by problems that may occur if dates won't translate from country to country. The United States is very vulnerable to this threat because it exports more than 20% of everything it makes and counts on commerce with its trading partners to support 12 million American jobs. The stability of U.S. imports is crucial, as well. For example, The U.S. presently imports about half of its petroleum products from other countries, and Venezuela is one of the top 10 petroleum product exporters to the United States. In late May, Venezuelan Presidential Chief of Staff Alfredo Pena announced the country needs $1.5 billion for Y2K compliance. If the United States and other countries have to chip in to help out Venezuela and other struggling countries, the Y2K price tag will rise again. Where does that leave the United States and its citizens in terms of the final bill for Y2K? The answer is that no one knows—yet. If individuals fail to upgrade their computer systems, it's easier to estimate what the cost will be. If they choose to upgrade or replace, the figure is even more definite. On a global scale, the question is still very much unanswered. There are potential benefits to the Y2K problem that should help ease the costs and inconveniences. First, it has caused companies to take a hard look at the vulnerability of their systems. Second, it should have spurred companies to upgrade or implement solutions that will enhance their competitive position for years to come. And, it has made us all realize our interdependency with the other members of the global community. The key, as President Clinton noted in his Jan. 19 State of the Union Address, is for "every state and local government, every business, large and small, to work . . . to make sure that [the] Y2K computer bug will be remembered as the last headache of the 20th century, not the first crisis of the 21st."  by Jennifer Farwell
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