Too late for many to avoid Y2K bug chaos

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It is already too late for most small to medium businesses (and even householders, for the home is vulnerable, too), to meet the technological problems year 2000 will bring.

Many, if not most, businesspeople have yet to assess their exposure and to discover that now it is difficult, if not impossible, to hire technicians capable of finding and fixing sources of upset. The shortage of skills and time is worldwide.

And the problems are not only with microchips. Insurers are now saying companies, and their directors, may not be covered because the problem is known and has been foreseen.

Banks, too, are warning their customers of the dangers ahead and, while firm policies have not yet been put in place, many expect stiffer rules or higher rates of interest to be applied to loans and overdrafts advanced to companies that have not moved to limit their risks.

The insurance industry around the world is battening down the hatches in anticipation of a tsunami of claims resulting from year 2000 losses.

US insurers have asked regulators for permission to exclude the losses from their commercial liability policies. So far, all but four states have allowed them to deny cover for year 2000 claims. One estimate is that the wave of litigation and claims could run to $1trillion worldwide.

In Australia, a growing number of insurers seem to be moving towards excluding cover for directors of companies that could be sued as a result of year 2000 liabilities. This is seen as an area of particular vulnerability.

It's one thing if a computer breaks down because it cannot read the date. But if it forces a business to shut down for months, the losses could run to millions of dollars.

Under Section 232 of Corporations Law, directors have a common law duty to act with care and diligence. Those who fail to ensure the company is taking adequate steps to deal with year 2000 issues may be in breach of those provisions. Without directors' and officers' insurance, they could face bankruptcy.

One insurer, SGIO, has already put in place a blanket Y2K exclusion for directors and officers. They will not be covered if they are sued for negligence that has resulted in losses. Other insurance companies are expected to follow suit.

Mr Emilios Kyrou, who heads the year 2000 Practice at the law firm Mallesons Stephens Jacques, said that insurers were not only relying on that argument. Blanket exclusion clauses, he said, were being inserted with a view to put the matter beyond doubt.

The biggest problem, experts say, is to convince everyone that this is not just a personal or mainframe computer problem. A non-compliant computer network could produce nonsensical accounts and company reports. But the problems extend far beyond that and into the very fabric of commerce, industry and the home.

The bug is everywhere - in the millions of pre-programmed microchips embedded in everything from hand-driers to blast furnaces.

For example, if a non-compliant chip controls the bar-code printer in a food factory it could begin stamping something like ``Use by: March 1902'' on packages making them potentially unsaleable.

Finding all these chips and checking them is now impossible. All anyone can now do is assume and assess possible risks and plan to mitigate the damage.

Hundreds of thousands of small and medium businesses in Australia could be hit. For some it may be no more serious than having their building's doors unlock themselves at the wrong time. Others may find their very existence threatened.

The danger is not only within a company's own systems but in the networks to which it is linked. The jargon-term is inter-dependence, meaning that millennium bug infection lies within the complex, intertwined networks of computerised systems now essential to modern business - production and delivery systems, report generation, national and international funds transfer, product ordering and materials supply - almost every aspect of business, from payroll to profit, is potentially vulnerable.

Large companies such as Telstra, Qantas, and the big banks have spent hundreds of millions of dollars protecting themselves. But, according to industry experts, small and medium enterprises have barely begun to think about the problem.

Mr Nicholas Pullen, an IT specialist at Holding Redlich, the Melbourne law firm, says thousands of Australian small businesses have been ``playing ostrich''.

``They've put it on the back burner and dealt with what they thought were more pressing things to do,'' he said. ``But it's too late now to start fixing systems if you are starting from ground zero.'' All most small companies could now do was assess their exposure and make contingency plans to minimise the damage.

In the home problems may show up in almost any modern appliance, from a microwave to a cordless telephone. A TV remote control may not work, a CD player may malfunction or a security system fail to work. Even some heart pace-makers are said to have potential problems.

A recent report by Gartner Group, the big IT industry analyst, suggests that about 50per cent of all companies will not be ready for the year 2000 date change. Banking, insurance and investment services had a good grip on the situation, but essential services offered by government, by electricity, gas and water utilities, transport, education and similar industries generally were furthest behind.

Accurate figures on the state of readiness in Australia's essential services are not yet available, although Gartner says Australia is one of the six leading countries conducting Y2K programs.

Significantly for Australian business, Japan and South-East Asia are named among those seriously behind in dealing with the problem.

Mr David Ashmore, a partner in William Buck, a Melbourne firm of chartered accountants with an IT arm allied with it, said that most small businesspeople probably had no real idea of the extent of the technical problems facing them, let alone the legal and financial consequences.

``It's a risky time because no one knows the full extent of potential failure,'' Mr Ashmore said. ``We are all assuming that power will be there and gas, but the recent ice blockage in the gas pipeline in Victoria was a little demonstration of what could happen.'' A single non-compliant chip undetected could cause a major problem. ``We have about 200,000 small to medium businesses in Victoria,'' he said. ``If only one in 10 of those were affected it could have serious consequences for the state.''