http://www.amcity.com/philadelphia/stories/1999/05/17/focus1.html?h=y2k Philadelphia Business Journal

May 17, 1999 Who's spending what, how it's hurting Local Y2K costs: $500M and counting Peter Key Staff Writer Nearly half a billion dollars. That's how much the Philadelphia area's 25 largest publicly traded companies expect to spend making sure their computer systems and other equipment are ready for the year 2000.

In filings with the Securities and Exchange Commission reviewed by the Business Journal, the companies estimate they will spend from $455.05 million to $480.6 million fixing their Year 2000, or Y2K, problems.

The biggest spender is also the biggest company in the region.

Cigna Corp., the Center City-based insurer that was the area's largest publicly traded firm last year as measured by revenues, plans to spend the most on Y2K remediation -- $150 million.

The second-largest spender is the area's ninth largest company, Peco Energy Co. The Center City-based electric utility says it will spend $75.4 million readying its computers and other devices for 2000.

While impressive, those figures are but very small drops in the very large bucket of money corporations the world over are doling out to make sure their date-sensitive equipment doesn't see the two zeros in 2000, conclude that 1900 has dawned again and wreak all kinds of real and virtual havoc.

Companies worldwide will spend from $300 billion to $600 billion solving their Y2K problems, according to GartnerGroup, an information-technology consulting firm based in Stamford, Conn. GartnerGroup estimates that American companies will spend from $50 billion to $75 billion on the same task.

Yet even the top numbers in those ranges may understate the expense involved.

Dale Vecchio, GartnerGroup's Y2K research director, said the company only estimated the cost of fixing software to recognize years beginning in "20." Some who add in the cost of fixing hardware, including devices that aren't computers but have circuitry that tracks dates, and litigation expense put the total at $1 trillion, Vecchio said.

"This is a really hard thing to predict," he said.

It has a pretty simple origin. To save space when computer storage was expensive, programmers designated years by just their last two digits; the first two were always assumed to be 19.

The result has been a mammoth effort to identify software and hardware that can't read years beginning with 20 and repair or replace it before it begins encountering those years.

Beyond saying that it's very large, guessing the scope of the problem -- often called the Y2K, or millennium, bug -- is impossible.

No one really knows how much computer hardware and software can't recognize years beginning with 20, let alone how much of it can't be fixed or replaced before Jan. 1, 2000 arrives. Also, no one really knows what the equipment will do when it encounters years it can't correctly read -- shut down, malfunction or plow blithely onward, incorrectly processing all date-related information it encounters.

On top of all that, the problem isn't limited to computers. A huge number of electronic devices, from elevators to video-cassette recorders, contain date-sensitive chips. How many of these so-called embedded circuits won't be able to recognize years beginning with 20, and what they will do if they can't, is anyone's guess.

As a result, predictions of what will happen when the New Year dawns range from nuclear missiles going off and electrical grids the world over shutting down to a large range of minor problems cropping up.

"I don't think we're going to see major catastrophes, but I do think we're going to see a lot of nuisance-related breakages (in the United States)," said Jim Laird, the director of Y2K services for King of Prussia-based CoreTech Consulting Group Inc.

The SEC has tried to make sure U.S. companies give their investors an idea of what could happen to them -- and what they're doing to make sure it doesn't.

Since last year, the agency has required companies to detail in their quarterly earnings reports how much they think they'll spend to solve their Y2K problem; how much they have spent; what they are doing; when they will be done and what could happen if they don't get done in time.

Not all companies are complying in exactly the same manner.

For example, Universal Health Services Inc. still hasn't filed an estimate of its Y2K remediation costs. In its most recent financial filing, an annual form called a 10-K that it submitted March 31, Universal said it "has not been able to reasonably estimate the total costs ...s ince measurement of the costs has not yet been completed." Linda Reino, the King of Prussia-based hospital company's chief information officer, said its capital expenditures related to the year 2000 will be at least $6 million to $7 million this year.

Jones Apparel Group Inc., the women's clothing manufacturer based in Bristol, said in its 10-K filed March 25 that it had spent "approximately $445,000 in direct external costs" as of Dec. 31, 1998, but that it "does not separately track the internal costs ... as such costs are principally the related payroll costs for the management information systems service group."

Peco, on the other hand, details its programs and costs in mind-numbing detail. Michael Wood, a company spokesman, said the utility wants "to give people a comfort level that when we move into the New Year, we don't expect our service delivery to be any different than a day prior."

Although the amounts the area's largest companies are spending and the amount of detail they are providing vary widely, most seem to be in pretty good shape, according to their SEC filings.

Nine of the companies say they will complete their remediation programs in summer; another seven say they will be done by the end of October. The remainder either didn't say or said they will continue testing throughout the year.

Most large U.S. companies are in good shape in terms of being ready for the Year 2000, according to Y2K consultants. One reason is that they began working on the problem earlier than many other organizations. Another is that they have a lot of resources to throw at it.

"They have the financial capability to properly put funds in place to get them where they need to go," Laird said. "Every one of them clearly underestimated how much money they had to spend to address Y2K, but they are continuing to spend that money out of necessity and are continuing, for the most part, to be OK."

Still, two recent reports give some cause for concern. Triaxsys Research and the New York office of Deutsche Bank Securities both analyzed Y2K disclosure statements filed with the SEC by hundreds of the country's largest companies. Based on the companies' Y2K budgets and what they've spent already, both concluded that many large companies left themselves only this year to complete more than half their remediation work. That doesn't mean they won't get the work done, but it does mean they have to hope they don't encounter any unpleasant surprises.

Not everyone agrees with the conclusions reached by Triaxsys and Deutsche Bank. Susan Thomas, who heads Blue Bell-based Unisys Corp.'s Year 2000 consulting group, said the market for its services "wound down about six months ago," which she takes as a good sign.

"If people were still in trouble and still had a lot of work to do, they would spend money," she said.

While there is some debate about the Y2K readiness of large U.S. corporations, nearly everyone agrees that financial service firms, such as banks, insurers and brokerage houses, are furthest along the remediation curve. For instance, the Federal Deposit Insurance Corp. recently said that more than 10,000 of the banks it insures are making satisfactory progress in dealing with the Y2K issue, while only 24 aren't.

One reason financial firms have made so much progress is because they are being prodded by the myriad regulators with which they deal. But another at least equally important reason is that they are among the most computer-dependent companies in existence.

"Their whole product is represented by a computer," GartnerGroup's Vecchio said. "They have to have them working."

Many manufacturers fall at the other end of the readiness trail, according to Y2K consultants. Their problem often isn't with their computers, but with production equipment that contains embedded date-sensitive circuits.

"For a lot of those companies, the alternatives were very, very expensive or non-existent," said Bill Schloendorn, a principal with Blue Moon Consulting LLC, which has offices in San Jose and Horsham.

The expense shows.

Of Philadelphia's 25 largest companies, the third and fourth highest in terms of Y2K spending are Camden-based Campbell Soup Co. and Center City-based Sunoco Inc., both of which have extensive production processes -- for food and petroleum, respectively. The fifth-highest, Crown, Cork & Seal Co., which has its headquarters in Northeast Philadelphia, manufactures packaging products.

-- Arlin H. Adams (ahadams@ix.netcom.com), May 18, 1999