Y2K costs and counting

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Y2K Costs And Counting

Florida's biggest businesses spent over $300 million on Y2K problems

By Patrick Danner Miami Daily Business Review February 4, 2000

While the turn of the calendar to Jan. 1, 2000, has come and gone with minimal disruption to computer systems, the millennium bug continues to be a pest.

South Florida companies spent gobs of money to combat the year 2000 problem -- fighting the clock to ensure their computers didn't shorten calendar years to two digits and impose the date Jan. 1, 1900 as the new decade dawned. Those contacted believe the effort and expense were worth it because there were few, if any, problems to speak of when New Year's Day arrived.

Nevertheless, some experts say it could be months, or years, before issues surrounding the year 2000 problem are resolved. Much of it may take place in courtrooms, where companies that were affected have sued computer vendors and consultants. Insurers already are on the defense against suits brought by companies seeking to recover millions in costs associated with Y2K remediation.

Meanwhile, some companies continue to grapple with year 2000 issues.

Take Aviation Sales Inc. The Miami-based aviation maintenance and parts company had plans to unveil a new computer system prior to 2000. But as work was progressing, the company became concerned the system wouldn't be ready in time.

"It was too close for comfort," said Michael C. Brant, the company's chief financial officer. So, the decision was made to fix its existing system. But the $1 million estimate of what it would cost to make the fixes fell substantially short.

"At the end of the day, it will end up costing us one-half million to one million more than what we had anticipated going into the process," Brant said. He wouldn't disclose details of the cost overrun.

That, along with some other disheartening news at Aviation Sales, led it to announce last week its fourth-quarter earnings would be "significantly short" of analysts' estimates.

There's no telling how much was spent to fix the Y2K problem. The Gartner Group, a Stamford, Conn., business and technology advisory firm, estimated the total cost worldwide to fix the problem could reach $600 billion.

A calculation by the Daily Business Review shows expenditures by the 10 South Florida public companies that spent the most totaled more than $300 million. Figures were provided by the company or taken from financial statements and may include costs of upgrades or enhancements to computer systems not necessarily related to year 2000 problems.

Topping the list was Miami-based Ryder System Inc., which spent about $65 million, closely followed by Sunbeam Corp. of Boca Raton. Sunbeam estimates $64 million will have been spent on year 2000 issues.

"We had a lot of work to do here," said Sunbeam spokeswoman Rocki Rockingham. "There had not been an investment in IT [information technology] for a lot of years. The number is a reflection of upgrades to all our systems."

PRIORITIZING, ANALYZING Y2K preparation by companies included identifying systems at risk, prioritizing the potential disruption and analyzing whether any malfunctions would result in any problems. The preventive work done by companies ranged from expanding the date fields in computer programs from two digits to four -- a labor-intensive, complex and costly task because it involves reading millions of lines of computer code -- to something as simple as installing a new software program.

To be sure, companies on the list and reached for comment reported no problems with the transition. And they're fairly confident all of the money spent to remediate was worthwhile, though there is some doubt whether all of the money spent was warranted.

"I'm not sure anybody in any business or any industry can [say] with 100 percent certainty" that there were no serious problems because of the money spent to fix the Y2K problem, says Keith Holcomb, senior vice president of information technology at Fort Lauderdale-based AutoNation Inc. "I think I'm 80 percent sure that if we had not gone to the effort we would have had problems." AutoNation spent $21.9 million to prepare for year 2000.

Carnival Corp. spent about $16 million, $1 million less than it previously estimated.

"Our view is Y2K was a very real issue," said Carnival spokeswoman Jennifer de la Cruz. "We did find vulnerabilities in our system during the course of Y2K activities. And we would have been impacted if we had not remediated those problems. Was it over-hyped? Yes, but, nonetheless, it was a very real issue."

"We didn't have any Y2K problems," added Scott Mall, a Ryder spokesman. "We felt the remediation efforts were part of the reason we didn't have any problems."

Some liken the exercise to getting a flu shot: You can't say with absolute certainty the reason you didn't get sick was because of the precaution you took.

HO-HUM Such responses don't surprise Loren K. Newman, a lawyer with Fort Lauderdale-based Tripp Scott.

"You're not going to get anyone to step forward to say they wasted $50 million of shareholder money," Newman added. "Even if they did, nobody is going to step forward and admit it publicly."

And there are plenty of reasons to think some companies may have gone overboard with spending on Y2K. For example, the National Federation of Independent Business Education Foundation in December estimated as many as 1.5 million small employers made no effort to detect and correct year 2000-related glitches before the New Year. Still, that nonaction didn't seem to hurt those businesses, though the foundation hasn't done a follow-up study.

"We had a few things reported, but as a general rule, nothing," said William J. Dennis, the foundation's senior research fellow. "It turned out to be the biggest ho-hummer I've ever seen."

However, that may be because most small-business owners operate relatively new equipment and software that they bought right off the shelves, unlike many major companies, which operate hardware and software expressly designed for them.

Not everyone, though, is convinced that Y2K bug is dead.

"I think we're really at the front end of the types of problems that are going to occur," says Stephen E. Krulin, a North Miami lawyer who sits on the Florida Bar's computer law committee. "We're not going to lose our electrical grids; our water system will be working correctly," Krulin says, "but the problems that are going to confront us are associated with computer application systems." The bugs will be with inventory and accounting systems, for example, rather than anything life-threatening, he says.

LAWSUIT PROSPECTS Even so, nobody is expecting the kind of litigation that many had been predicting. U.S. Rep. David Dreier, R-Calif., last February estimated there might be $1 trillion in lawsuits filed over Y2K.

The Gartner Group advisory firm, estimated worldwide year 2000 costs would be somewhere between $1 trillion and $2 trillion, said Lou Marcoccio, Gartner's research director. That includes information technology and business remediation efforts, fixes after Jan. 1 and litigation costs.

The cost to fix actual Y2K problems that appear after Jan. 1 and the cost of litigation was projected by Gartner to be between $100 billion and $200 billion. It didn't break out litigation costs separately.

"We assumed the litigation price wouldn't be phenomenally high," Marcoccio said.

Krulin, the North Miami lawyer, says he's not aware of any South Florida companies that have had Y2K problems. But he described a paper company that still is trying to work out its Y2K bugs. Most problems, though, are being reported anonymously.

"They know they have problems, they know their databases and inventory are corrupted, they know they have to rewrite checks by hand, but it's not something they're going to advertise to their competitor, to their vendors or to others in the supply chain, if they think they can fix it," Krulin said. "Out of this will come all sorts of lawsuits, but we won't know that for a certain period of time."

In fact, Philip Upton, a partner at PricewaterhouseCoopers in New York and author of its "Y2K Litigation Advisory," predicts the key time frame for year 2000 litigation is the second quarter of this year. That's because of the time lapse built into the process.

Under the Y2K Act signed into law last summer by President Clinton, a prospective plaintiff must give written notice by certified mail to each prospective defendant. In turn, the prospective defendant receiving the letter has 30 days after receipt of the notice to address how it will handle the problem. Once it responds, it has another 60 days from the end of the 30-day notice period to complete the proposed remedial action.

"If a [prospective defendant] were to utilize each period in full, this would result in a 90-day period before a case could appear," Upton says. "Consequently, any Y2K litigation resulting from a Y2K failure won't be filed most likely until the second quarter."

Yet Upton doubts there will be much litigation. He believes most of the cases will be resolved through negotiations.

The Web site 2000law.com, which tracks Y2K-related cases around the country, hasn't reported any Y2K litigation filed since Jan. 1, though there are suits that were filed before the New Year. And Kim Tomlin, the program administrator for the Florida Bar's computer law committee, said she has received no inquiries about any Y2K issues being mediated.

Projections about enormous Y2K litigation costs had some lawyers gearing up for an onslaught of business. Clyde Wilson Jr., a Sarasota lawyer who heads his firm's national practice in computer, Internet and high-technology litigation, says there were a lot of "instant overnight software litigation experts."

"I did a great deal of consulting on Y2K, but I had no grand illusions about this $6 trillion litigation feast that a lot of these lawyers were looking forward to," he says.

Jose I. Rojas, a partner with Broad and Cassel in Miami, said his firm prepared for what he described as "that secondary level of litigation."

"We figured if there was a fallout in litigation, it would shift from hardware and software providers to professionals, such as accountants, who either had been in consulting or in audit failures where they failed to detect any problems," Rojas said. "I think there will be some [litigation], but based on the way things have gone -- and I've been monitoring it -- it doesn't seem to me that the volume of either threatened or actual litigation is anywhere close to [projections] prior to this year."

Wilson expects litigation prompted by firms that rushed into purchasing and installing computer software to prepare for year 2000, only to discover it doesn't fit their business needs or wasn't installed properly. So while they ducked the immediate Y2K problem, companies may not be in the clear.

"Whenever you do that with software in haste, you regret it in leisure," Wilson said.

Other firms that handle computer law say they were not counting on year 2000 for a big windfall in litigation fees.

"I don't think there was any way to jump on it ahead of time because there was no way of knowing what was going to happen and who it was going to happen to," said Bard Rockenbach, a partner with West Palm Beach's Sellars, Marion & Bachi and chairman of the Palm Beach County Bar Association's technology committee.

INSURERS Insurance companies, however, might be facing the biggest battles when it comes to year 2000 litigation. Already, some companies have sued insurance carriers to recover remediation costs under a provision in some property insurance policies. The "sue-and-labor clause" permits companies to file claims to recover expenditures used to protect property from looming danger.

The thinking goes that companies spared insurers a major headache. "The money was spent to save insurance companies the bigger exposure down the road," said Rojas, a member of the Florida Bar's computer law committee. "It's sort of a mitigation of damages."

Insurance companies, on the other hand, argue that unlike a fire or a hurricane, the year 2000 was a foreseeable event, Wilson said.

"Insurance normally cover a fortuitous event, an event that's not foreseeable," Wilson explained. "Insurance companies would take the position that Y2K was very foreseeable, that the Y2K problem was nothing more than planned obsolescence." By that, he means computer programmers as far back as the 1960s were acting on the assumption that the software would be obsolete by the year 2000.

Among big name companies that have filed such suits against their carriers are Kmart Corp., Unisys Corp., Xerox Corp. and GTE Corp.

Xerox is represented by Kirkpatrick & Lockhart, a Pittsburgh-based firm with an office in Miami. A few years ago the Kirkpatrick firm formed a Y2K task force of 25 lawyers to address preventive measures and to devise a legal game plan in the event of year 2000 problems.

"It's not a case that the bug is dead or this chapter is closed, because there's ongoing analysis and active measures being taken by companies to determine whether there are cost-recovery avenues to pursue," said Terry Budd, a Kirkpatrick partner in Pittsburgh.

The insurance industry will fight any attempts to put carriers on the hook for year 2000 remediation expenses, said Steven Goldstein, a spokesman for the Insurance Information Institute, a New York trade group for the property and casualty insurance industry.

"There is no legal ground by which companies can sue their insurers," he said. "That doesn't mean they won't try. And some have. ... We're obviously going to fight those. [But] it's going to be pretty hard to prove damages. Nothing happened."

'OPTIONS OPEN' Some South Florida companies might be weighing the outcome of those cases before determining whether they will proceed with similar cases.

"We're exploring that, as are, I understand, a lot of other companies," said Ryder's Scott Mall. "No decisions have been made to date. We're exploring the entire issue because it has been raised by others."

"We're leaving our options open," said Lee Pernice, a spokeswoman for Sensormatic Electronics in Boca Raton. "I think it's a wait-and-see attitude to see how the courts treat this. We haven't decided against it, nor have we taken any action toward recovering remediation costs."

Others, though, don't expect to take any legal action.

"We don't have any plans to recover the costs," said Carnival's Jennifer de la Cruz. "Many of the expenditures have long-term benefits and have continuing value."


-- Martin Thompson (mthom1927@aol.com), February 05, 2000

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