From the December 1999 issue of Entrepreneur

You've read about it, been warned about it and heard examples of the dire consequences it could bring. January 1, 2000, once deemed doomsday for computer users worldwide, is only a few weeks away. Are you--and the people you do business with--ready?

Despite concerted efforts by authorities to downplay the crisis and avoid public panic, those who recognized the seriousness of the problem early-on challenged U.S. businesses and government agencies to pay attention. The end result appears to be that the most critical work has been done in time.

But probably not enough has been done to avoid some serious damage, according to Edward Yardeni, chief economist for Deutsche Banc Alex. Brown. Yardeni, who is widely acknowledged as Wall Street's top expert on the millennium bug, says Y2K is still not A-OK. Investor's Business Daily, The Wall Street Journal, Louis Rukeyser of public TV's Wall Street Week and others have praised Yardeni as one of the best economic forecasters of our time. So people are listening carefully to the criticisms of the "Don't Worry, Be Happy" school of Y2K thought found on his Web site (http://www.yardeni.com).

We spoke with him at the end of September, the day after he convened a conference of other experts to share information on the subject. It was also a few days after a U.S. Senate subcommittee released a report stating that an economic downturn next year was very possible because the Y2K problem had not been adequately addressed in other countries.

Whatever your position on the subject and however serious it turns out to be, it's best to be aware of everything that might impact your business.This could mean changing suppliers or arranging for multiple vendors, stocking up on products, making contingency plans, and even looking for market opportunities to capitalize on the Y2K-related weaknesses of competitors. But time is running out . . .

Scott S. Smith:In September, Congressman Stephen Horn's (R-CA) House subcommittee on Y2K issued its assessment of the federal government's repair work, which stated only 5 percent of so-called "mission critical" systems remained to be fixed. What exactly does that mean, and how comfortable should we feel as far as the federal infrastructure is concerned?

Edward Yardeni: The figures leave a lot of detail to be desired, and no one has set up any standard to define what "mission critical" means. Nor has anyone simulated what would happen if you had a coincidence of multiple non-mission-critical failures. Could that add up to a mission-critical situation? In some cases, organizations reduce the number of mission-critical systems they report on paper by reclassifying them; having fewer mission-critical systems allows these organizations to report a higher level of Y2K compliance.

Smith:The Horn report gave a readiness grade of B to the departments of Commerce and Energy. Transportation received a B- overall, but an F for its "high impact" programs. What could this mean for business next year?

Yardeni: The federal government has yet to do end-to-end tests on roughly 40 major programs, including Medicare and the state tax information exchange system, so good grades overall may not be enough. The Federal Aviation Administration (FAA) says it's ready, but a lot of small businesses are in areas served by smaller regional airports that are not completely ready. It would be one of the miracles of the 20th century if the FAA went from being one of the least likely to succeed to one of the agencies that puts it all together just in the nick of time.

Smith:Treasury received only a C-, and most checks go through that department.

Yardeni: The agency that handles checks has claimed to be compliant. I suspect the IRS dragged down that grade. [As one of the most computerized agencies in the world, the IRS' Y2K-compliance preparations are more complicated and time-consuming than those of other agencies.]

Smith:Experts report half the states and Washington, DC, are lagging behind a prudent time line in general Y2K compliance. What will be the effect?

Yardeni: Consider just one area of possible failure: the District of Columbia. DC only realized the magnitude of its problem at the beginning of this year. It's widely recognized that if you started preparing for Y2K compliance in 1997, odds are, you'll be successful and should be finishing right now. Those who started in 1998 will have a hard time getting it right. And there is virtually no chance that if you began working on the problem this year you'll make the deadline.

But even if DC gets its systems repaired, it's easy to foresee that many of the workers who operate these systems are likely to miss work because of distractions, such as their kids not being able to go to school [due to failure of computers used for classroom schedules, teachers' paychecks, and so on] since [schools are some] of the least prepared institutions for Y2K. If the DC work force is absent in the first days of the year, that could have a ripple effect in other areas.

Smith:What about the preparedness of other local governments?

Yardeni: We're hearing reasonably good reports, but the problem has been defined so personnel can succeed at what they are directly responsible for, which doesn't take into account interrelationships. The federal government's position is that national infrastructure will be OK, and if there are problems, they'll only be local. My response is that that's where we live! If there are enough local problems, it would be like a national hurricane, even a global one.

Smith:Software maker Zitel, which sells the sophisticated bug-detecting tool MatriDigm, contends that even after companies have tested and repaired their systems, 9 percent of the programs will still have flaws. That suggests overconfidence on the part of those who claim to be compliant.

Yardeni: Inevitably, new mistakes are entered when we try to fix anything. Contamination by systems that are not compliant is a serious threat. Some companies say they'll just fix things when they fail, but there is already a shortage of qualified IT people to do that. Imagine what it will be like in January.

Smith:Since computer consultants will presumably be too pressed for time at year-end to deal with small companies, I guess last-minute compliance efforts will have to be made on one's own with help from software vendors.

Yardeni: My surveys among IT professionals have found something disturbing. Software patches from third-party vendors for so-called mission-critical programs hadn't been provided in 20 percent of cases as of September. Even if you can get help from your software vendors, you need to be sure your suppliers and customers are paying attention to any upgrades they may assume have been taken care of. And you need to be prepared for things not to go smoothly because all the testing has been limited--nothing like the massive real-world data exchanges that will take place at the beginning of next year.

Smith:Shifting to other industry sectors, what is your best assessment of the utilities and phone systems?

Yardeni: Based on their own reports, they've found few date issues involved in producing and transmitting electricity. Of course, because these systems have to run 24 hours a day, seven days a week, there can't be any real-time testing.

Like electricity, phone systems can't be taken offline for testing, so we have to rely on lab simulations, which have given positive results. I suspect everyone will have small problems, so hopefully we'll resist the urge to all call for help on Monday, January 3rd, or the systems could be overwhelmed.

Smith:What about oil and gas?

Yardeni: Major corporations run these utilities, and they've put a lot of money and manpower into taking care of this, so I think the main systems will be more or less all right. But there's little independent verification.

Smith:Are transportation systems achieving compliance?

Yardeni: I'm hearing that [private transportation companies will] be OK, including railroads and trucking.

Smith:There has been concern about health care, especially in rural areas. The Senate report, for example, said there were 20 states where delivery of Medicaid payments was in danger. How do you see this panning out?

Yardeni: Health care is high on everyone's list of worries. Many doctor's offices are said not to be compliant, and maybe they won't be able to receive payments from federal programs. Hospitals provide a very mixed picture. Of course, the compliant ones could be overwhelmed if others are basket cases.

Smith:Everyone seems to agree that the financial sector is the most prepared of all industries, but many banks have international operations.That brings us to the other consensus, that our worst problems are likely to result from being integrated into a global marketplace where other countries are not nearly as prepared as the United States. What regions are of particular concern to U.S. businesses?

Yardeni: I'm concerned about the state of oil companies in Mexico and Venezuela, since they got a very late start. Kuwait didn't seem to know it even had a problem until last year.

The Japanese got a very late start but claim they'll be ready. I'm skeptical. The rest of Asia doesn't look like it's in good shape.China is at the top of everyone's list of countries likely to have Y2K failures, and [devaluation of Chinese currency] triggered the last Asian [financial] crisis.

The financial sector in Latin America is on top of the situation, but the manufacturing and government sectors don't seem to be as advanced.

For U.S. companies doing business internationally, the longer the supply chains, the greater the likelihood of weak links. And just-in-time manufacturing and energy production and distribution are especially at risk.

Smith:The Gartner Group noted a suspiciously quick rise in reported compliance between the end of last year and early this year from developing countries, including Mexico. What's your opinion of this?

Yardeni: At the government level, there's a lot of confidence in their systems. I'm less confident about key businesses and vendors.

Smith: Crisis Investing for the Year 2000 (Birchlane Press) by L. Jay Kuo and Edward M. Dua suggests that a prudent person would take out a month's cash from the bank, buy some gold and shift investments from airline and health-care stocks to security personnel and temp firms, assuming that workers will have to take up the high-tech slack. Is this a sensible game plan?

Yardeni: I tell people they should think about what they would do if they believed a recession of six to 12 months were coming next year, if the market were to decline 30 percent from its peak. I see a repeat of what happened in the summer of 1998, but lasting for six to 12 months, as 70 percent likely for reasons which include Y2K. Long-term investors might decide to do nothing, since very few people are good at market timing. I'd overweight government bonds, underweight stocks, and accumulate cash in the portfolio because there will be awfully good opportunities to get into the long-term bull market at better prices.

People should go into Y2K with their eyes wide open, not tightly shut, which is how too many are approaching it.


Scott S. Smith writes about business issues for a variety of publications, including Investor's Business Daily.