July 28, 1998

Y2K: WREAKING HAVOC ON THE CORPORATE FOOD CHAIN

Bill Howell had heard about the Year 2000 (or Y2K) computer bug, but he didn't expect it to crawl right into his mailbox. Over the past three months, Howell, the owner of a nine-employee petroleum-products distributor in Brooklyn, N.Y., has received some 10 letters from suppliers, clients, and banks -- each wanting assurances that his company would not fall into Y2K computer chaos (in which antiquated, two-digit computer dates flip to "00" come 2000, with unpredictable, potentially disastrous results). "Initially, it scared the hell out of me," says Howell, who now expects his tiny desktop computer system to be Y2K-OK. "The letters kept coming, and I've been told they're going to keep on coming."

As Howell has discovered, the threats posed by the Year 2000 bug are spurring a frantic rewiring of the way companies -- from General Motors down to the general store -- do business. When the bug began to hit the media radar in 1996 and 1997, Corporate America thought it needed only wrestle its own systems into compliance, and then move on. But planners soon realized that even if those were fixed, they couldn't assemble a truck, publish a book, or grow a tomato without the services and parts of their suppliers -- and in turn, their suppliers, ad infinitum. Now they're scrambling to preserve this delicate, economic ecosystem. And that's putting pressure on small fry, 82% of whom are estimated to be directly exposed to the Y2K glitch, according to a recent National Federation of Independent Business study (table). Of the 500 companies surveyed, just one-half said they had already taken action, or plan on it. "The small businesses that don't pay attention are going to be hurt the worst," says Lloyd Bell, who directs Bank of America's Y2K effort in Oregon.

As Main Street will soon discover, corporate compliance demands are now infiltrating the simplest of commercial transactions. Contemplating a line of credit? Bidding on a proposal from the local multinational? Maybe you're vetting orders directly through an electronic interchange system. Whatever the business activity, you'll likely have to show clients, vendors, and the local bank that your computers aren't bound for oblivion. Simply wave off the problem, and your customers could wave good-bye. "We're looking at our entire infrastructure," says Ken Ouchi, chief information officer at Selectron, a huge electronics manufacturer in Milpitas, Calif. The company recently canvassed more than 4,000 suppliers about their Y2K preparations, and if it suspects a vendor's internal systems could crash, it lines up "contingency suppliers." "We can't afford to have an outage because a critical supplier goes down," vents Ouchi.

Banks, which face tough federal regulations requiring them to minimize the Y2K impact, are starting to push small companies, too. Arkansas State Bank in Clarksville, Ark., for instance, recently made Y2K questions a standard part of its loan application. And loan officer Coral Gould is personally visiting certain small-business clients to keep tabs on potential Y2K shutdowns. "If you have loans with us, be concerned that everything is compliant, advises Gould, who says the bank might revoke credit from computer-dependent firms that try to evade solving the Y2 problem. "Some of them didn't have a clue," she says, "and we told them that they should be concerned."

Small-company owners say they understand the technical reasons for sharing their Y2K battle plans, but they're also wary that the queries are simply legal Trojan horses. As they see it, if a company should act negligently, or just too slowly, in repairing its Year 2000 glitches, then the correspondence could become part of a costly paper trail. "Everyone is playing this very carefully because of the threat of litigation," adds Ouchi, who estimates that just 10% of the 4,000 surveyed vendors have responded to his company's requests. Return rates of less than 20% are holding across all industries, adds Tom Costello, a consultant at CoreTech, which advises on Y2K in King of Prussia, Pa. "A lot of people are recommending that this letter traffic be certified mail," says Costello. "They're trying to guarantee receipt and response."

As Costello and other experts point out, however, most small companies can't afford to ignore the Y2K letters, especially if huge clients are threatening to yank their business. Just ask Howell, who received a query from South Jersey Gas Co., which, along with its request for details, admonished its vendors that if it did not receive a response it "will assume your company will not be Year 2000 compliant, and will therefore not meet our standard."

How, then, to respond to the Year 2000 deluge in a way that will simultaneously fix the glitch, keep your customers happy, and not lay the grounds for a lawsuit against you?

First off, companies can't forget about the mission at hand: To fix the Y2K bug. That's best done cooperatively, not adversarially. No one wants to put paying customers behind a stiff wall of legalese. "People need to have confidence in a company's ability to work through these things," says William Fenwick, partner at Fenwick & West, a Palo Alto (Calif.) law firm.

That said, don't be reckless. "You need to be honest, but be careful about what you admit, because it could come back and haunt you," says Joshua Slavitt, an attorney to high-tech companies at the Philadelphia firm Synnestvedt & Lechner. Even though some Y2K survey forms can ask dozens of detailed questions, Slavitt and other legal experts recommend that a company draw up a standard Y2K response outlining the company's current Y2K plans and its progress to date. "Don't pay any attention to what's in the survey, and use the statement across the board," recommends Fenwick.

Slavitt cautions: "If you check a box and send it back, you're making a very absolute statement. That is something that will either be true or not true. If it's not, you're putting yourself at risk."

Of course, what's also putting your company at risk is your own roster of business-to-business suppliers. You'll likely want to survey them about their Y2K preparations, which should help you gauge your own millennium-bug exposure. But be wary of guaranteeing their readiness to outsiders, notes CoreTech's Costello. "I don't see a lot of companies promising that," he says.

So goes life in this tightly wound business Web. As the millennium spins closer, companies may soon have to get used to the idea of relying on -- but not fully trusting -- one another.

By Dennis Berman
Staff Reporter, Business Week Online