Time Bomb

Computers everywhere are on a crash course to the year 2000. What are you planning to do about it?
Magazine Contributor
12 min read

This story appears in the June 1998 issue of Entrepreneur. Subscribe »

If you think the so-called millennium bug won't affect your business come January 1, 2000, you'd better think again. J. David Stewart, publisher of The Stewart Report financial newsletter, warns, "It is impossible to overstate the enormity of the implications because computers control every facet of life and there is so much interconnectivity between businesses, government agencies and the global economy."

Because programmers in the early days wanted to save precious, expensive hard-drive space, they included only the last two digits of years, believing that long before the end of the millennium, computers would change to some new type of dating system. As a result, at the turn of the century, computers that have not been fixed will think it's 1900. That will cause mainframe computer systems to fail or spew out inaccurate information--everything from incorrect mortgage statements to phone bills that show calls lasting 100 years. Even computers that have been corrected could go haywire if they interact with computers that are not date-ready. With an astonishing number of computer operations date-connected, major disruptions are inevitable--and there simply isn't enough time left to correct all the problems, say Stewart and other experts.

Credited as the investment guru who first called attention to the business opportunity created by this problem, Stewart is especially focused on what the millennium bug means for entrepreneurs. He's been an entrepreneur himself since the age of 14, when he started a lawn-care service in Denver with five employees. By age 21, he'd become the nation's top manufacturer of cedar mailboxes, beating Federal Way, Washington-based Weyerhaeuser Co.'s attempts to compete with him regionally with its line of cedar mailboxes. With the ability to sense trends, he sold that business at its peak and became a stockbroker, then a stock analyst highly regarded for his talent for picking companies poised for spectacular growth.

In 1992, Stewart decided to get off the fast track and broaden his knowledge of the world economy, spending years visiting other countries to talk to executives and observe local stock exchanges. He launched The Stewart Report in 1996 in Dana Point, California, to provide investors with research on small-company stocks. While researching early that year, he ran across Data Dimensions, a firm that supplied programmers who could fix what became known as the "Y2K problem" or the "millennium bug." The company became the first in a series of stock recommendations that brought Stewart international attention as one of the few to grasp the implications of the impending technology crisis, ideas he elaborates on in a book scheduled for release on the intentionally symbolic date of July 4. We spoke with Stewart about the implications for entrepreneurs: first about the economic consequences if government and industry are not ready, then how to take advantage of the business and investment opportunities that will emerge over the next few years.

Entrepreneur: The media have generally covered the year 2000 computer crisis by saying it's being exploited by those seeking to profit by fear-mongering. How serious is it, really?

J. David Stewart: Those who have downplayed the significance of this have been thoroughly discredited and pretty much silent since the beginning of this year, as the magnitude of the problem has finally started to sink in. Capers Jones, chairman of Software Productivity Research Inc., estimates the cost of this problem will be $3.6 trillion, once you factor in not only the need to pay people to make the corrections, but the lost productivity because of diverted resources that could be otherwise used to improve competitiveness, the economic damage caused by those who don't make the deadline, and the resulting litigation.

Entrepreneur: What kinds of impacts should entrepreneurs be most aware of?

Stewart: Let's start with the financial system. Last December, The Gartner Group, which is considered the leading authority on estimating industry segment progress, reported that large banks were on target to finish in time. But many midsized banks are seriously behind, and smaller ones typically are not devoting anywhere near enough resources to making the changes. Banks have some of the biggest exposure because of their primary reliance on mainframes and the large number of smaller computers they use for millions of calculations and customer records.

If you want to know how prepared your bank is, you can't just ask the manager whether the bank will be compliant; you need to ask specific questions about its plans and monitor them. You'll want to know something about the bank's customer base and how strong its financial resources are in case customers start having trouble meeting loan payment deadlines. You especially need to be assured it's devoting about 50 percent of its Y2K process time to testing after it's made the initial changes. This is especially true if it's not using an automated system for making the corrections, because human errors run around 30,000 per million lines of code vs. zero to two for an automated technology.

In fact, any major company that's not automating the conversion is in danger of not finishing in time. As Peter de Jager, owner and president of de Jager and Co., a Toronto company that disseminates Y2K information, and author of Managing '00: Surviving the Year 2000 Computing Crisis (John Wiley & Sons Inc.), says, "If you don't finish on time, it is the same as having never started!"

Entrepreneur: What is the status of the telecommunications industry?

Stewart: Many utilities are working hard on this, but you need to check your local situation, including Internet and cell phone services. You have to be sure not only that all your vendors and suppliers will be ready but that they're making sure theirs are, too. The possible weaknesses in the chain are endless, and you'll need help from a Y2K specialist to think this through.

Entrepreneur: What else is going to be critical?

Stewart: Those who are working on this discover new ramifications every day. Particularly crucial for business will be how well the transportation system holds up. For starters, check the vehicles you use, since most have dozens of microchips. For that matter, will your state motor vehicles department be able to renew your license? Semi-trucks also have chips that prevent them from being overdriven, so if the year suddenly seems to be 1900, they could shut down. There will undoubtedly be problems with the delivery of gas. The Federal Aviation Administration uses a difficult computer language that has made progress on [the Y2K problem] very slow. While airports have backup safety systems that allow them to work with traffic without using those computers, there are certain to be major schedule disruptions.

Entrepreneur: How are the local, state and federal governments doing?

Stewart: A handful of states are in very good shape, many are questionable, and others are too far behind to avoid a crash of their computers and all that implies. As for the federal government, Rep. Stephen Horn (R-CA), Chairman of the House Subcommittee on Government Management, Information and Technology, issued a report card on March 4. His staff assessed the progress of each federal department and the biggest agencies in correcting mission-critical and support systems. Only the Department of Veterans Affairs, the National Science Foundation and the Social Security Administration got "A" grades, meaning they're on top of things. But Social Security checks, like those of most agencies, are issued through the Department of the Treasury, which got a "D" because only 60 percent of its systems are on target to be ready--and that assumes private industry doesn't bid away government programmers when the crunch comes. Overall, the federal government received a "D-."

Entrepreneur: What can individuals do about this?

Stewart: You can aggressively lobby your representatives and the agencies most critical to you to put the Y2K problem at the top of their list of priorities. Then prepare yourself--the regulatory environment and the infrastructure are likely to deteriorate significantly.

Entrepreneur: What about the international situation?

Stewart: [Although many countries are working on this problem,] Australia, Britain, Canada and Ireland are [the furthest along], according to The Gartner Group. Western Europe is preoccupied with conversion to the new European currency next January, and by then it will be too late to make sufficient changes to keep their economies anywhere near their current level. The rest of the world is much further behind, and you can expect that governments will fall because of this.

Entrepreneur: Other than checking out business relationships, what else should an entrepreneur do?

Stewart: Take care of your internal situation first, and be sure someone you trust thoroughly understands the progress you're making; don't simply delegate it to consultants. Get on the phone with CEOs of companies you deal with; don't leave everything to your employees or the mail. Get a computer security firewall--CyberGuard's are the best, in my opinion--to protect your data from contamination.

Leave an audit trail of communications on all Y2K matters and see if your attorney can secure statements protecting you from legal liability if you can't perform services for reasons beyond your control. You'll want both legal and accounting input from those with knowledge about Y2K issues--and be sure those firms are going to be compliant themselves. You also need to warn your customers that there may be delivery problems and encourage them to buy in advance. Finally, plan to stockpile inventory, and encourage your vendors to do the same.

Entrepreneur: What should an individual investor specifically do to strengthen his or her financial situation?

Stewart: Investors will realize the extent of the financial impact of Y2K as companies report radically reduced earnings, which will result in a lack of overall market confidence. Those able to provide solutions to the problem will make a tremendous amount of money in a short time, but ultimately the uncertainties and litigation will probably make them unsafe investments, too.

I am already out of blue chip stocks because large companies are so mainframe-dependent and have so many customers in different industries and countries. There will be too many variables they can't control because of interconnectivity. The time to buy back those that are compliant and otherwise strong will be when even they get dragged down with the general market. I plan to hold on to these for a long time because the recovery will probably take quite a while.

I will also make sure I have the appropriate stock certificates because it may become impossible to verify holdings electronically for a while. I'm getting hard copies of the records of all my assets and other important documents for the same reason. I'm gradually increasing my cash position and keeping some out of the bank, and I'm selling off some luxury possessions to raise cash while the economy is strong, and postponing buys of other items because prices will drop as the economy worsens.

Entrepreneur: Is there a silver lining?

Stewart: Believe it or not, I'm an optimist by nature; I detested the doomsayers of the 1970s. I know I sound like an alarmist since the economy is thriving, but this is the consensus of those of us who really know what's going on. But there is some good news in all this.

First of all, you can create wealth from Y2K-related investing, which includes figuring out which stocks are likely to fall. Those of us who have been optimistic about the health of the market now have to learn how to master the flip side of investing. Some sectors should actually do well in an economic downturn. For example, the movies boomed during the Depression, and entertainment is a less date-sensitive industry than most. Those who have the resources to do long-term investing have a chance to emulate the masters of the game, like the legendary John Templeton and Warren Buffett, contrarians who bought when everyone was pessimistic and stock prices were low, then sold when prices were high and there was unwarranted optimism.

And let's not forget the fortunes that have been made by businesses positioned to take advantage of the difficulties of competitors. This will be a once-in-a-millennium opportunity for phenomenal growth. The big companies have the biggest vulnerability, no matter how much money and how many people they throw at this. Business is likely to become much more decentralized, creating unlimited openings for entrepreneurs who shrewdly see gaps in the supply line they can fill, perhaps switching the business they are in entirely.

Look at industries and companies that are not well on the way to solving their Y2K problems or that are too dependent on very distant sources. One business I think would thrive would be storage as companies need to stockpile inventory and individuals become more mobile. Food and pharmaceuticals are probably going to be in high demand. If government services fail, private firms could fill some gaps. Even where there is limited cash, businesses can do well by bartering for items that will have incredible value later, while using the solid currency of gold to get what they need.

Even if you think we're wrong in our predictions, by making defensive and offensive moves now while there is still time, you can position yourself strongly regardless of what happens. Once you get over the shock that everything isn't likely to proceed in the gradual move upward we have all been conditioned to expect, you'll realize the situation may present a quantum-leap opportunity to those who grab it. That could be very exciting and rewarding.

Scott S. Smith is a freelance journalist living in Los Angeles.

Next Step

Think you have a Y2K problem? Fortunately, you can find help on the Internet.

The SBA's Y2K site (http://www.sbaonline.sba.gov/hotlist/year2000.html) offers a multitude of information and links to related sites. The U.S. General Services Administration has also posted Y2K information at http://www.itpolicy.gsa.gov, which should be of particular interest to entrepreneurs doing business with the federal government.

Many companies have also established Y2K sites, including:

If you've checked these sites and you still can't find the information you need, use your Internet search engines and look under "Y2K" for broad research on the issue.

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