25 May 1998

Girding for the Y2K Crash

By now almost everyone has heard about the "Year 2000" or "Y2K" problem, the notorious computer glitch that will deceive some computers into thinking the year 2000 is 1900. This flaw results from computers using the last two digits as shorthand for calendar years. If uncorrected, it may cause computers to malfunction or even crash upon the turn of the century.

Keep in mind that merely resolving your company's internal exposure to the Y2K problem is not good enough, since firms remain vulnerable to Year 2000 disruptions of their trading partners, including suppliers, shipping vendors, customers, brokers and companies that conduct business through electronic data interchange.

How do you limit such exposure?

First, identify the parties whose Y2K problems could have an adverse impact on your company. Here are some examples to consider:

* Your company's biggest overseas supplier stops performing on a long-term contract because its inventory system has crashed. Like many companies in the Third World, your supplier took a "wait and see" approach to the Y2K problem.

Your supplier cannot predict when business will be back to normal, because computer consultants are not available. (They are busy fixing the Y2K problems of the highest bidders).

Consequently, your company defaults on its obligations to perform contracts with existing customers.

* Significant trading partner that transacts business through electronic data interchange tells
you it needs to suspend those transactions and revert to conducting business on paper until it fixes the Y2K damage to its computer systems.

Although its computer network still "works", all trading data before January 1, 2000, has vanished, and your trading partner now needs to rely upon your EDI records to reconcile all open trades.

As a result, your company is forced to devote personnel and resources to help resolve your trading partner's problems and ends up doing significantly less business with that firm.

* Your company's main shipping vendor hits you with a double whammy. Its computer trafficking system has crashed and, for several weeks, it has been unable to tell you where many of your shipments are.

You are also told to expect delays and higher freight rates because ship-related Y2K problems have reduced the number of available vessels. Most modern ships have "embedded" computer chips that run a variety of functions, from refrigeration to maintenance. These chips may malfunction upon the turn of the century.

Any one of these problems can have devastating consequences.

While you may not be able to erase all of your company's exposure to the millennium bug, it is important to remember that the key to minimizing Year 2000 problems is addressing the foreseeable problems now, rather than dealing with the consequences later.

Once you have identified all potential parties, you should consider placing them on written notice of your concerns and seek assurances that they will be able to fulfill their obligations into the next century.

Notification letters place your trading partners on notice, providing you with many advantages their Y2K problems lead to litigation.

They can prompt your trading partners to evaluate their Year 2000 risks and begin taking corrective steps today, which may confirm that your partners have only had news. In which case you will now have time to consider alternative solutions.

When a trading partner receives the notification letter, you detail the economic losses you could suffer if the company is unable to comply with the contract after January 1, 200. A court is must more likely to hold your partner liable for such economic damages on the grounds that your company's losses were foreseeable

The best response you can receive from your suppliers or customers is that they have already completed their remediation efforts and will perform their contractual obligations without interruption.

Your trading partner may indicate that it is now the process of remediation