May 26, 1998

SMALL BIZ AND Y2K: UNPREPARED -- AND IN FOR A SHOCK?

Pentagon computers on the fritz. Banks that lose track of customers' deposits. Damages from the Year 2000 bug are most often portrayed on a large canvas, where huge institutions and public works are brought, science fiction-like, to a wrenching standstill. Such scenarios overlook the fact that most of the nation's 23 million small companies will also be tainted -- both directly and indirectly -- by the Y2K glitch.

So says a May 26 study from the small-business group National Federation of Independent Business (NFIB), which in a survey of 500 small-biz owners found that 82% face direct exposure to a Year 2000 snafu. The study also found risk in these companies' indirect exposure to Y2K work stoppages: Nearly 6 in 10 report electronic links with business partners that, if interrupted, would likely hamper a small company's competitiveness.

Of course, public reactions to the computer bug have ranged widely, with doomsdayers and optimists taking turns hyping and knocking down claims of imminent computer meltdown. But if an economic shock is in store (see BW, March 2, 1998, "Zap! How the Year 2000 Bug Will Hurt the Economy"), the NFIB study shows a small-business community too busy or too carefree to pay attention: Just 29% of those surveyed considered Y2K a serious problem. Nearly 40% classified it as "not at all serious." And just 10% expected Y2K to bite into revenues.

Less than one-quarter of surveyed companies have already begun fixing the computer bugs. Some 27% intend to take action, and 46% have made no plans.

Are the unprepared in for a big surprise? "It clearly is going to be a problem for an awful lot of them," argues William J. Dennis Jr., author of the NFIB study, which was conducted by the Gallup Organization and funded by Wells Fargo Bank.

The pervasive spread of high-tech into the workplace has upped small companies' computer dependence of late -- 74% of surveyed outfits use computers for billing and accounts receivable, 76% rely on a PC for accounting and general ledger duties, while 20% power up to help operate machinery and equipment. An additional 45% of small companies view computers as critical to their suppliers' operations.

Not all these programs and platforms are vulnerable to Y2K breakdowns, but manufacturers have been slow to fix problems in popular off-the-shelf programs. And concerns rise dramatically over the readiness of customized software -- which 39% of surveyed firms reported owning.

What's worse, says Dennis, is that "people tend to focus on and think that it's just a hardware or software problem." But the survey shows that 34% of small companies rely on some sort of imbedded microchip or timing device in machinery. "And that's not easy to find," he warns.

There are a few bright spots, however. Small companies are still much less likely than bigger counterparts to rely on the bulky, decades-old, custom programs that are most vulnerable to Y2K bugs. And they're also less likely to use electronic data interchange -- a computerized way for business partners to share data and inventory records that is Y2K-vulnerable.

Indeed, smaller does seem safer. Even among companies in the survey, the smaller an outfit's annual revenues, the less likely it was to report direct exposure to Y2K breakdowns: A full 100% of companies with gross sales above $2 million said they are directly exposed to possible Y2K outages. The number dipped to 67% for companies with sales under $250,000.

However, even the smallest fry might eventually have to take note of Y2K paranoia. According to Dennis, large companies are requiring small suppliers to sign contracts certifying their Y2K-compliance. His advice: "If you haven't checked, you're not going to know if you comply." In the 18 months left to the millennium, small companies will soon learn the answer, whether they care to know or not.

By Dennis Berman
Staff Reporter, Business Week Online