[Senate Hearing 106-342]
[From the U.S. Government Publishing Office]
S. Hrg. 106-342
YEAR 2000 GLOBAL CORPORATIONS:
WILL THE BUG BITE BIG BUSINESS
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON THE
YEAR 2000 TECHNOLOGY PROBLEM
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
Y2K IMPLICATIONS AND PROBLEMS INTERNATIONALLY
__________
JULY 22, 1999
__________
Printed for the use of the Committee
Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
U.S. GOVERNMENT PRINTING OFFICE
62-344 CC WASHINGTON : 2000
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
SPECIAL COMMITTEE ON THE
YEAR 2000 TECHNOLOGY PROBLEM
[Created by S. Res. 208, 105th Cong., 2d Sess. (1998)]
ROBERT F. BENNETT, Utah, Chairman
JON KYL, Arizona CHRISTOPHER J. DODD, Connecticut,
GORDON SMITH, Oregon Vice Chairman
SUSAN M. COLLINS, Maine JOHN EDWARDS, North Carolina
TED STEVENS, Alaska, Ex Officio DANIEL PATRICK MOYNIHAN, New York
ROBERT C. BYRD, West Virginia, Ex
Officio
Robert Cresanti, Staff Director
T.M. (Wilke) Green, Minority Staff Director
(ii)
C O N T E N T S
------
STATEMENT BY COMMITTEE MEMBERS
Robert F. Bennett, a U.S. Senator from Utah, Chairman, Special
Committee on the Year 2000 Technology Problem.................. 1
Christopher J. Dodd, a U.S. Senator from Connecticut, Vice
Chairman, Special Committee on the Year 2000 Technology Problem 5
Gordon Smith, a U.S. Senator from Oregon......................... 3
CHRONOLOGICAL ORDER OF WITNESSES
Jacquelyn L. Williams-Bridgers, Inspector General of the
Department of State and the Broadcasting Board of Governors.... 8
Ron Balls, Chairman of International Telecommunications Union
Year 2000 Task Force........................................... 19
Gary Beach, Publisher, CIO Magazine.............................. 25
George Surdu, Director of Technical Services, Ford Motor Company. 31
Kevin Click, Director Worldwide Y2K Corporate Compliance Efforts,
Philip Morris Companies, Inc................................... 35
Patrick M. Roberts, Senior Vice President for Business and
Information Services, Ahold USA, Inc........................... 36
Charles Krichbaum, Director, Year 2000 Project Office, Praxair,
Inc............................................................ 39
Kevin Haukebo, Y2K Program Manager, Procter & Gamble............. 41
ALPHABETICAL LISTING AND MATERIAL SUBMITTED
Balls, Ron:
Statement.................................................... 19
Prepared statement........................................... 49
Responses to questions submitted by Chairman Bennett......... 69
Beach, Gary:
Statement.................................................... 25
Prepared statement........................................... 71
Responses to questions submitted by Chairman Bennett......... 84
Bennett, Hon. Robert F.:
Opening statement............................................ 1
Prepared statement........................................... 86
Click, Kevin D.:
Statement.................................................... 35
Prepared statement........................................... 99
Responses to questions submitted by Chairman Bennett......... 104
Dodd, Hon. Christopher J.:
Statement.................................................... 5
Prepared statement........................................... 106
Haukebo, Kevin:
Statement.................................................... 41
Prepared statement........................................... 107
Responses to questions submitted by Chairman Bennett......... 110
Krichbaum, Charles:
Statement.................................................... 39
Prepared statement........................................... 112
Responses to questions submitted by Chairman Bennett......... 114
Lugar, Hon. Richard G.: Statement................................ 4
Roberts, Patrick M.:
Statement.................................................... 36
Prepared statement........................................... 115
Smith, Hon. Gordon:
Statement.................................................... 3
Prepared statement........................................... 120
Surdu, George:
Statement.................................................... 31
Prepared statement........................................... 121
Responses to questions submitted by Chairman Bennett......... 122
Williams-Bridgers, Jacquelyn L.:
Statement.................................................... 8
Prepared statement........................................... 87
Responses to questions submitted by Chairman Bennett......... 98
Note: Responses to questions submitted by Chairman Bennett to
Patrick M. Roberts were not received at the time the hearing
was published.
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
General Motors Year 2000 Statement............................... 124
YEAR 2000 GLOBAL CORPORATIONS: WILL THE BUG BITE BIG BUSINESS
----------
THURSDAY, JULY 22, 1999
U.S. Senate,
Special Committee on the Year 2000
Technology Problem,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SD-192, Dirksen Senate Office Building, Hon. Robert F.
Bennett, chairman of the committee, presiding.
Present. Senators Bennett, Smith, Stevens, and Dodd.
OPENING STATEMENT OF HON. ROBERT F. BENNETT, A U.S. SENATOR
FROM UTAH, CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000
TECHNOLOGY PROBLEM
Chairman Bennett. The committee will come to order.
We welcome you all to today's hearing, which deals with Y2K
implications and problems internationally. We are going to hear
not only from the State Department but also from global
corporations, many of whom have a better understanding of what
is going on in some of these countries than any one else.
The corporations that have provided us with witnesses today
will play an instrumental role in sustaining America's economic
strength and they have helped create a level of prosperity that
is unrivaled in American history. The success of these
companies is vital for our nation's continued economic growth
on the world stage and we turn to them to ensure that adequate
preparations are underway for the year 2000 technology problem.
The fates of the companies are linked in some fashion to
the ever-changing state of international affairs and locating a
business or a subsidiary abroad means becoming vulnerable to
potential political, economic and infrastructure disruptions in
another country. I know that firsthand from having owned and
operated businesses overseas and having been caught in the
currency devaluation problems that occur there, that are
unfamiliar to those that stay entirely within America's
borders.
Just as Y2K poses challenges to in our own country,
companies overseas may be at risk of electric or
telecommunications failures or to the snapping of critical
distribution and supply chains that cross international
borders. For these companies preparing for Y2K is a task that
involves not only American know-how but also the efforts of
overseas governments, subsidiaries, partners, vendors,
suppliers and facility managers.
Now, the growth of global corporations has accelerated over
the last three decades. In 1970, just before the advent of the
microchip some 7,000 global corporations existed and today that
number is 38,000. It is no coincidence that the number of
global corporations has increased with the corporate
community's increased use of high-tech information business
systems. You can get information and money across national
borders now with a keystroke at literally the speed of light.
Global corporations have always comprised an important
thread in the complex web of global economic interdependence
between nations. In many cases, American companies act as
economic and cultural emissaries, expanding free trade and
opening markets and spreading democratic values, bringing
higher standards of living for working people across the globe.
The Information Age presents global corporations with
unprecedented opportunities to build new international
partnerships that are beneficial for the United States and its
economic partners but the same high-tech systems that benefit
many companies also contain inherent weaknesses. Instantaneous
communications and just-in-time inventory, manufacturing and
transportation systems are all vulnerable to the Y2K problem.
Assessments of the Y2K preparedness of the international
community are numerous and they vary greatly, demonstrating the
wide range of uncertainty that exists globally. For instance,
the Global 2000 Coordinating Group, which is comprised of the
various members of the global financial community, who have
joined forces in an effort to address the Year 2000 challenge
have developed the assessment that is contained in the chart
that we see. And those who have seen earlier charts will see
that the number of countries that used to be all red are now
fortunately green and yellow and there are a few places that
used to be green that are now yellow that gives you some
concern.
I am interested that the United States, which used to be
considered all green, now has three yellow areas in it. I do
not know quite what has caused that but that demonstrates the
fluctuating nature of this one group's area of evaluation.
There is only one country there that is red all the way across
and those of you who cannot see it and squint, I will save you
the responsibility of trying to get up close to the chart, that
is Russia. China used to be given the same all red evaluation
but in the latest update they have changed China to a
combination of amber and green.
Well, because of the uncertainties of these evaluations,
major shareholders in the global economy must assess their
options and establish realistic and practiced Y2K contingency
and business continuity plans. In many cases, those continuity
plans are as important as anything else. The clock says 162
days, 13 hours, 49 minutes and 31 seconds. So, that ticks off
at every hearing we have and demonstrates there is much work to
do.
I am sorry that I cannot stay for the entire hearing but
Senator Smith, who has the responsibility within the committee
for examining the state of readiness in the business community,
is going to serve as the chairman and I am very grateful to him
for his willingness to do that and the expertise that he brings
as a businessman to understanding all of this.
The companies that are represented here today have
exemplary Y2K programs. They have established themselves as
leaders in this field and the committee is grateful to the
witnesses and to their companies in their willingness to
address the problem.
We had one company that we were expecting to hear from.
Unfortunately they have had scheduling problems and will be
unable to testify in person. That is McDonald's. People perhaps
do not realize the degree to which McDonald's operates
internationally. They have 24,500 restaurants in 115 countries.
And they were unable to get a witness at a proper level to
appear before us today but they have offered to testify at a
future date and we look forward to receiving their testimony,
as well.
With that, I am happy to turn the gavel and the hearing
over to Senator Smith who will conduct today's hearing.
[The prepared statement of Chairman Bennett can be found in
the appendix.]
Thank you.
STATEMENT OF SENATOR GORDON SMITH, A U.S. SENATOR FROM OREGON
Senator Smith [presiding.] Thank you, Mr. Chairman.
Good morning to all of you and I welcome you as well to
today's hearing on the Year 2000 challenges facing our global
corporations.
As one who has engaged in international commerce I do
understand the impact that our international economy has on our
national boundaries. Today very few countries are economically
self-sufficient without the presence of global corporations.
Global corporations are among the world's biggest economic
institutions. A rough estimate suggests that the 300 largest
global corporations own and control at least one-quarter of the
entire world's productive assets.
Global corporations' total annual sales are comparable to
or greater than the yearly gross domestic product of most
countries. Though based predominantly in Western Europe, North
America, and Japan, global corporations' operations span the
globe. Global corporations face many of the same issues as
domestic companies, such as maximizing profits, meeting
customer demands and adapting to technological change.
Global corporations must also stay current with trends and
events in the various countries where they operate. All nations
are tied into a global economic interdependence. International
trade consists of a broad array of commercial interests and
relationships that involve most products and service sectors.
These, in turn, rely on a global web of critical services.
Disruptions in the relationship among suppliers and customers
abroad can seriously affect the well-being of individual
companies, specific industry sectors, and international
economies, as well.
As our committee has examined in the past, many important
components of the international trade system are highly
computerized, interdependent and very sensitive to the Y2K-
date-related changes. The most important components of the
infrastructure are energy production and distribution
facilities, transportation modes, communication channels, and
financial networks. Breakdowns in any part of the trade support
structure could slow or halt shipments of key components needed
to keep factories working, hospitals functioning, food in a
continuous supply and people employed.
As of today there are only 162 days remaining until January
1, 2000, as the chairman has noted. With this in mind, I want
to stress the impeachable of ensuring the participation of
executives at all levels of business and government in planning
for such an event. This problem will not simply go away. Each
of us must do our part to make certain that the Y2K problem is
adequately addressed.
As we work together I'm sure that we will develop a greater
understanding of this problem and forge effective solutions. It
is our cooperation which will bring us together and allow us to
reach our final goal. I would like to welcome all of the
witnesses who are before us today.
We are particularly pleased to have representatives from
Fortune 100 companies who are household names to all of us.
Your willingness to step forward in this forum to testify on
this critical issue affecting your business and the global
economy is very commendable and we thank you for that.
I am very pleased to be joined by Senator Richard Lugar
from Indiana and the vice chairman of this committee, Senator
Dodd of Connecticut.
Senator Dodd, I have just given an opening statement.
Senator Bennett has before he departed.
Vice Chairman Dodd. Well, I will just take a minute or so,
if I can. Thank you very much. Have you already had an opening
statement?
Senator Lugar. No.
Vice Chairman Dodd. Why do you not go ahead. No, no, please
do, and then I will collect myself here. I just walked in the
door. I apologize.
[The prepared statement of Senator Smith can be found in
the appendix.]
STATEMENT OF SENATOR RICHARD G. LUGAR, A U.S. SENATOR FROM
INDIANA
Senator Lugar. Well, let me just express appreciation to
Chairman Bennett and to you, Chairman Smith and to Vice
Chairman Dodd. As I have read the testimony it appears once
again that the hearing is timely, that the groups that are
coming before us today are extremely important in the solution
but, that as is often the case, many are aware of the problem
and do not want to alarm either their clients, their customers,
their government or elsewhere. The fact is that all of us are
still groping with uncertainty and hoping that the proper
connections are made. But certainly the consequences for the
assets, the sales, the jobs that are involved today are very,
very substantial and much, because of the nature of this
hearing, is not dependent upon things that we do in this
country alone.
And, so, at least the profile of the hearing to indicate
the importance of this to the American Government as well as to
American corporations and their multinational aspects is
extremely important. Now, we always learn a great deal from the
hearings, but I am hopeful that the focal point of the hearing
will simply be once again to raise the fact that this is
important.
What we found in the hearing of the committee last week at
another end of the spectrum with State and local governments is
that many local governments have not yet begun to prepare. Many
of our constituents of those local governments are not
convinced that there is a problem. That will not be the case in
the hearing today but it is a fact that people have varying
degrees of seeing that this is a problem, enormous ranges of
expenditures, which may indicate how seriously they think the
problem is being met or that they should meet it, and at some
point there will be a reckoning.
I made the point last week as a former mayor and local
government official my guess is a good number of mayors are
going to be surrounded by their constituents and they will be
unhappy, because at the local level people take systemic
failure very poorly, and hold somebody responsible. My guess is
that will occur with major United States corporations that as
sales fall off, as people cannot be found, as the distributions
that are unforetold occur, that this will have ramifications
for people and responsibility as well as for jobs.
So, I appreciate very much being a part of the hearing and
your calling, Mr. Chairman.
Senator Smith. Thank you very much, Senator Lugar.
STATEMENT OF HON. CHRISTOPHER J. DODD, A U.S. SENATOR FROM
CONNECTICUT, VICE CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000
TECHNOLOGY PROBLEM
Vice Chairman Dodd. Thank you very much, Mr. Chairman.
In the last couple of days I have spent a lot of time with
my colleague from Indiana. We appeared yesterday before the
Senate Foreign Relations Committee talking about reforms of the
sanctions regimes, unilateral sanctions and the like, and the
deleterious effect that the sanctions regime can have on the
United States and on businesses, industries, particularly the
agricultural sector of our society, which I know both of my
colleagues, the chairman here this morning, Senator Smith, who
and Senator Lugar have a particularly high awareness of and are
sensitive to. In a sense those are situations where by our
decisions we create dislocation. Because we impose sanctions,
sometimes for good reason, but not fully appreciated in
understanding the implications and ramifications.
What we are talking about here, in a sense, is an accident
that I suppose could have been avoided had people thought about
more intensely about 10 years ago and that is this Y2K bug
issue. But in a sense, failure to address the question could
have the similar kind of repercussions internationally.
As Senator Lugar has pointed out, we had a very good
hearing last week talking about the impact of the Y2K issue at
the local level, the small cities and towns, large cities in
this country and elsewhere, where the effects of a failure will
be most directly and immediately felt by people across the
country. If their 911 number does not work, the water system
does not work, the sewage system does not work, the traffic
lights do not work, that is where you are going to feel it
right away.
To an extent, this morning we are going in the other end of
the spectrum from a small town in Indiana, Oregon or
Connecticut, to a large corporation that does business all over
the world. And to that extent, I think this is a very
worthwhile hearing and I am very interested in hearing what our
witnesses have to say because of the responsibility, as Senator
Lugar has just pointed out and I am sure Senator Smith did as
well, of these large companies with incredible capital
hardware, real estate, cash, to expand and maintain a presence
in multiple nations all across the globe, have a heightened
degree of responsibility of addressing this issue.
There is a significant potential, obviously, for cascading
failures. When you talk about the larger the entity is, a large
utility, obviously, can have a profound effect. Well, certainly
in a global corporation that can be the case as well.
Imagine, if you would, a multi-million dollar holding
company that manages the supervisory operations of multiple
business entities around the world. Think of the ramifications
if a business like this falls victim to an internal problem
which from the top down creates a spiraling deluge of secondary
problems. The cumulative effect would be overwhelming and that
is precisely why we decided to hold this hearing this morning.
We are interested in learning where Y2K problems may be
manifested and to what extent these corporations have
inoculated themselves against Y2K malfunctions. The
corporations are among the world's biggest economic
institutions. A rough estimate suggests that 300, the 300
largest global corporations own or control at least one-quarter
of the entire world's productive assets. It is a stunning
statistic, 300 of the largest global corporations.
Though based predominantly in Western Europe, North America
and Japan, global corporations span the entire earth and
account for sales revenues that are comparable to or greater
than the GDP of more than 50 percent of the world's nations.
Last year revenues derived from goods and services sold
outside the United States by the top 100 multinationals
increased by 5 percent to $958 billion, while overall revenues
totaled $2.5 trillion.
Today few, if any, countries are economically self-
sufficient. Everyone is shipping parts to everyone else.
Microprocessors built in Arizona or California are shipped to
Hong Kong for installation in a computer system that manages
point-of-purchase operations in a manufacturing company in
Buenos Aires.
The ever decreasing costs of communications, combined with
an ease of transportation has encouraged global corporations to
conduct business with organizations in other countries as
easily as one farmer traded his produce for goods in town at
the beginning of this century.
Each of the largest global corporations utilizes thousands
of critical suppliers, many of whom are located
internationally. As a result, the global corporation must
ascertain the Y2K compliant status of each of its critical
suppliers to ensure that day-to-day operations are maintained.
This can be a daunting task and I am sure it has been, as we
will hear.
The interconnectivity of any business that utilizes
computer systems, whether internally or via many relationships
that are maintained among business entities, is where the real
risk lies. Interdependencies exist on so many levels that it is
almost impossible to tell where or when problems in one area
could surface in another.
Global corporations, because of the international
relationships they must maintain, are expressly threatened by a
date-related computer malfunction. The very nature of these
organizations, with their myriad interdependencies among
suppliers, shipping organizations, ports, financial
institutions, manufacturers, leaves them particularly
vulnerable, in my view, relative to smaller enterprises which
maintain few business relationships.
In addition, the international trading system, with its
complex web of distributors, customers and transportation
links, is supported by a critical infrastructure of products
and services. The most important components of the
infrastructure are energy production and distribution,
facilities, transportation modes, communications channels, and
banking institutions. These sectors are highly computerized and
interdependent as well and are particularly sensitive to dates
for the smooth exchange of goods and services.
These characteristics render them especially susceptible to
Y2K-related problems. Breakdowns in any part of the trade
support structure could slow or halt shipments of key
components needed to keep factories and industries working,
hospitals functioning, food in continuous supply and people
employed.
So, Mr. Chairman, again, this is a very worthwhile hearing
this morning. I am very, very interested in hearing where our
larger corporations think we are. Tomorrow I will be
participating, along with Senator Stevens and Senator Byrd, at
a conference in West Virginia, an intraparliamentary meeting
with our counterparts in Great Britain for 2 days. And I have
been asked, in fact, to lead a panel on the Y2K issue and, so,
I will be very interested in hearing this morning what people
have to say to share with a critical ally of ours and a major
partner in the G-8 where they think things are. And, obviously,
the information you share with me this morning could be
valuable.
I am particularly pleased to recognize Mr. Krichbaum of
Connecticut, my constituent, who is here with us who is the
Director of the Year 2000 Project for Praxair, Incorporated, in
Danbury, Connecticut, which is the largest producer of
industrial gases and maintains a market presence in more than
40 countries. And I am pleased to have him before the committee
on a later panel.
Thank you, Mr. Chairman.
[The prepared statement of Vice Chairman Dodd can be found
in the appendix.]
Senator Smith. Thank you very much, Senator Dodd.
Our first panel will consist of Ms. Jacquelyn Williams-
Bridgers. . She has been before us before and her testimony was
very valuable then and so much so, we have asked her to come
back and speak to this particular aspect of the Y2K problem.
Welcome.
STATEMENT OF JACQUELYN L. WILLIAMS-BRIDGERS, INSPECTOR GENERAL
OF THE DEPARTMENT OF STATE, AND THE BROADCASTING BOARD OF
GOVERNORS
Ms. Williams-Bridgers. Thank you very much, Senator Smith,
Senator Lugar, Senator Dodd. I thank you again for the
opportunity to come before this committee on global readiness
for millennium change. International trade, with its
interdependent web of suppliers, distributors, service
providers, and customers, relies on an efficient interface of
infrastructure components such as financial organizations,
telecommunications networks, transportation systems and energy
supplies, just as Senator Dodd has articulated. Any disruptions
in this infrastructure and connections between suppliers and
customers will affect the vitality of the international trade
system, as well as national and regional economies around the
globe.
At the March 5 hearing of this committee on international
Y2K issues, I provided an overview of global Y2K readiness. My
message to the committee at that time was decidedly mixed.
Industrialized nations were well ahead of the developing world,
however, some were at risk of having Y2K-related failures
because they got a late start at the national leadership levels
and because they were heavily reliant on computer technology in
key sectors.
Developing countries were generally lagging behind and were
struggling to find the technical and financial resources to
attend to Y2K problems. Former Eastern bloc countries were late
in getting started as well and were generally unable to
articulate to us where they stood in terms of Y2K remediation.
Today, with less than 6 months to go before the date
change, my message is still quite mixed but much more
optimistic. Approximately one-half of the 161 countries
assessed have a medium or high risk of having Y2K-related
failures in their telecommunications, energy and transportation
sectors. Industrialized countries are generally at low risk of
having Y2K infrastructure failures, particularly in the finance
sector.
Approximately two-thirds of the countries in the developing
world have a medium or high risk of experiencing Y2K-related
failures in the telecommunications, transportation and/or
energy sectors. Similarly, key sectors in countries that
comprise the newly independent states and the former Eastern
Bloc countries have a relatively high probability of Y2K
failure.
These assessments suggest that the risk of disruption will
likely extend to the international trade arena, where a
prolonged breakdown in any part of the supply chain would have
a serious impact on the U.S. and world economies. In light of
all of this, the challenge now facing the United States is to
encourage and facilitate contingency planning by individual
countries, by regional partnerships, and through international
organizations, such as the U.N.
The State Department has implemented measures to assess Y2K
readiness of all countries where the U.S. has a diplomatic
presence. Efforts are underway to ensure that such information
will be disseminated to Americans traveling, working and
residing abroad. Nearly all embassies have completed their host
country assessments and developed contingency plans for embassy
operations and delivery of American citizen services.
Next month, the Department plans to notify host country
governments of our concerns about Y2K problems in-country and
in September, the Department plans to begin issuing Y2K
notifications to the American public. Over the past 2 months,
my office has continued our direct engagement with host country
government representatives and private sector representatives
in-country on international Y2K issues. We have also analyzed
161 host country infrastructure assessments submitted by our
embassies.
I brought along today certain charts to demonstrate where
we have determined that there may be varying risks of computer
systems failure in five key infrastructure sectors that will
affect international trade, as well as all other aspects of
life. Our analysis reflects the status of 39 industrialized
nations, 24 countries in the former Eastern bloc and the newly
independent States, and 98 countries in the developing world.
[The charts referred to can be found in the appendix.]
Ms. Williams-Bridgers. Please direct your attention to
chart one. In our charts blue indicates the number of countries
that have a low-risk of failure for a particular sector; yellow
indicates a medium risk and red is high-risk. So, in our charts
the blue is the good area, that is where you want to be.
Worldwide the finance sector is at a lower risk of Y2K
failure than telecommunications, transportation, energy and
water. About two-thirds of the 161 countries assessed have a
low-risk of failure in their finance and waste-water sectors.
The finance sector is particularly vulnerable because of its
reliance on energy and telecommunications sectors where, in
more countries than not, there is a medium-or-high-risk of
failure.
Chart two shows industrialized countries. They generally
have a low risk of Y2K-related failures, particularly in the
finance sector. About one-third of these countries were
reported to be at medium risk of failure in the transportation
sector with nearly as many countries facing a comparable risk
of failure in their energy and water sectors.
The U.S. Department of Commerce identifies Japan as the
largest supplier of U.S. professional and technical, scientific
equipment and machine tools, and the third largest export
market for U.S. goods. Although Japanese officials have
acknowledged to us that they are confident to us that all
critical sectors will be Y2K compliant by the end of the year,
they are concerned that their late start may hamper their
ability to thoroughly address the Y2K problem. However, we were
quite gratified to find that the Japanese had been working
quietly toward compliance to a much greater extent than had
been reported in the popular press, and that they were
providing more information in English.
Korea is the home of one of the world's busiest airports
and, thus, a critical link in the international trading system.
With the exceptions of banking and telecommunications, the
public and private sectors in Korea got off to a very late
start in addressing Y2K. Although both the government and the
private sector organizations are reporting remarkable progress
in remediating and testing their systems, we are concerned that
their late start and the economic recession may hinder their
ability to do a thorough job of testing and remediation.
Taiwan is one of the world's largest suppliers of
information technology and telecommunications equipment.
Taiwanese authorities and large business enterprises have made
a great deal of progress in addressing Y2K. During our visit to
Taipei we were told that key parts of the infrastructure
appeared to be in compliance or close to it. However, Y2K
readiness of small-and-medium-sized companies in Taiwan as well
as small medical facilities remains a big question for us.
In chart three, we are showing that there is a much higher
risk of Y2K-related failures in developing countries. Over one-
half of developing countries have a medium or high risk of Y2K-
related failure in telecommunications, transportation, and/or
energy sectors. However, a relatively low level of
computerization in key sectors of the developing world may
reduce the risk of prolonged infrastructure failure, given that
these countries will probably revert to manual operations.
Some issues facing the developing countries: India reports
that Y2K readiness in the last 6 months has made substantial
progress, especially in banking, finance, civil aviation, and
telecommunications. But nowhere is the Y2K process complete in
India, and contingency planning has barely begun.
In Vietnam, there is a very low-level of computer use and a
relatively low threat of Y2K failure. It was difficult to
obtain information from Vietnam as the government keeps the
information very close.
Our last chart shows the least amount of blue. We found
that more than one-half of the 24 countries including Russia
and the former Eastern Bloc, face a significant risk of Y2K
failure in almost every sector. In Russia, the nuclear sector
reports that all safety systems are Y2K compliant and
provisions are being made to ensure that backup power will be
available. Plant computer systems may have undiagnosed problems
that could force a shutdown of their nuclear reactors. But we
expect safety systems may work as needed.
The picture I presented here suggests that the global
economy is likely to experience some Y2K failures in every
sector, every country, every region. As such, Y2K-related
disruptions in the international flow of goods and services are
likely to be affected but no one knows exactly when, where and
to what extent such disruptions will occur.
A leadership role by the Department of State to facilitate
contingency planning is much needed. A lot of work is underway
around the world developing contingency plans for continued
functioning of governments, of infrastructures, of businesses,
and supporting organizations within individual countries.
However, little is being done to consider the potential supply
chain disruptions around the globe and how they should be
handled.
With assistance from other Federal agencies, the Department
of State may be able to leverage the efforts of international
organizations that already have active Y2K outreach programs by
promoting a global approach to Y2K contingency planning.
At this stage, it would be prudent and realistic to
recognize that Y2K-related failures are inevitable both here
and abroad. As such, the efforts of the Department of State and
other international organizations will be instrumental in
minimizing the impact that Y2K may have on the global
community.
This concludes my short statement.
Thank you very much for allowing me the extra time. I would
be pleased to answer any questions that you or members of the
committee may have.
[The prepared statement of Ms. Williams-Bridgers can be
found in the appendix.]
Senator Smith. Thank you very much. We are very pleased to
be joined by Chairman Stevens and Senator Stevens, if you have
any opening comments or----
Senator Stevens. No. I have got a bill on the floor, I just
dropped by to see how things were going.
Thank you very much, Mr. Chairman.
Senator Smith. Very good.
You mentioned that Vietnam is not being forthcoming with
information. Are there other countries that are just not taking
this seriously or not participating or do not take seriously
the outreach we are trying to provide to other countries?
Ms. Williams-Bridgers. I think there are more countries
asking for outreach than we would be able to realistically
extend in terms of technical assistance, financial assistance,
and the like. I think increasingly national governments are
recognizing the need to pay attention at a national level, in a
very organized fashion to address Y2K.
Once you get below the national levels of government, and
move into local and regional sectors, I think that is where we
need to begin focusing our attention to ensure that
organizations operating at the local and regional level are
paying adequate amounts of attention.
Senator Smith. You testify as to the readiness of ports and
shipping interests. And I wonder if you can speak to the Panama
Canal and what is being done there to facilitate Y2K readiness?
Ms. Williams-Bridgers. Sure.
When we visited the Panama Canal in September 1998, we were
told by Panama Canal officials that they would probably shut
down the canal in anticipation of potential Y2K-related systems
failure by ships passing through until officials received
certifications from the ships that they were Y2K compliant.
This will reduce the chance that ship in the lock would disrupt
the flow of the other ships.
However, in April of this year, the canal officials we are
told advised that they had issued a message to all shipping
agents, operators and owners notifying them that prior to their
entry into the canal they must submit documentation as to their
Y2K compliance. Therefore, the canal officials will have some
assurance that there will not be a disruption of the flow of
traffic through the canal.
Senator Smith. Senator Dodd?
Vice Chairman Dodd. Thank you.
Thank you very much.
A couple of things. One, I noticed that China is not on the
list here, and nor is it on the Gartner Group list and when you
take China and India, Malaysia, you start getting about three-
quarters of the world's population and if you look at--I am
sorry, China is on the Gartner Group, I apologize. Well, it is
not on yours, though. Can you share with us what your
assessment on China?
Ms. Williams-Bridgers. Our team has not been to China yet
and that is why at this point in time we did not include China
in our testimony. We anticipate going to China in the near
future. Our trip was delayed by recent political events with
China; however, we anticipate going within the next 2 months.
Our embassies have begun collecting assessments but our
methodology has been to look at the embassy assessments of host
country government readiness and also to have conversations
directly with host country governments and business
representatives so that we can get a more comprehensive sense
of the readiness of the country.
Vice Chairman Dodd. China--I missed it--but it is number 37
on that issue. You, obviously, cannot see it from where you
are. But shows that they have a color-coded system of showing
green if you are in good shape, amber or yellow is a call that
indicates that improvement needed and the adequacy of current
public information and so forth. It is not bad but it is still
short with 162 days to go. Red shows you have got some real
problems. Black indicates we do not have any information. So,
China is all yellow and red. It has got one sector in red, the
energy sector.
Under your charts, well, under this chart, as well,
sticking with the Gartner Group for a minute, they have got
Malaysia is in pretty bad shape, according to the Gartner Group
as they look at it. And you go down the list here. Some of them
are worse. Russia, of course, is in very bad shape as they
indicate it and show it on their list.
One of the issues that gets raised a lot is the independent
review. To what extent did your assessment rely on government
officials sort of reporting this or did you rely on any outside
assessment of these assessments being made?
My experience, having been in several of these countries,
is that there is very little independent review. They are
drawing conclusions from people within their own departments,
and no one wants to pass along bad information so you get a
pretty good report at the top and no outside group comes in and
makes an assessment.
What did you find?
Ms. Williams-Bridgers. Your conclusions are aligned with
our findings. Our site visits generally included where we have
visited countries we have not only met with host country
government officials, but we have also met with business
representatives. We have read open source materials. We have
read the media. As a standard practice we have met with
American Chambers of Commerce there and here before we leave.
So, we try and get as much information from as many different
sources as possible.
Senator Dodd, I would like to make another point about the
differences in the risk assessments of Gartner Group, Global
2000 and my office. Our assessments are a little more
optimistic than both Gartner Group and Global 2000. However, I
think what we are saying is quite consistent, simply stating
that we cannot rest on our laurels now.
If you were to use a rating system of pass-fail instead of
a rating system of medium or high risk, your systems are either
compliant and they will be functioning after January 1 and you
pass or they are not compliant. If you have no assurance
through testing, or through completion of all the remediation
phases, then you have to work with a level of uncertainty.
I think that both Global 2000 and the Gartner Group would
agree that it is prudent, and appropriate for us to focus our
attention on contingency planning in those areas where we
anticipate that Y2K testing and remediation will not be
completed in a timely fashion to give us the types of
assurances that businesses will be able to continue, that
governments will be able to continue to function and that life-
support systems will continue to operate after January 1.
Vice Chairman Dodd. Did you use any outside consultancies
in your assessments or was it all done internally?
Ms. Williams-Bridgers. All of our host country government
assessments were done with internal staff.
Vice Chairman Dodd. Two more quick questions, if I can.
One has to do with the European Union. In Europe, there is
no, as I understand it--you correct me if I am wrong--but based
on my conversations in Europe on Y2K is it is done country-by-
country.
Vice Chairman Dodd. The European Union, itself, has not
taken on the responsibility of trying to have some sort of a
Union approach to the Y2K issue. So, it is being left to each
country to do its own remediation and contingency planning and
the like. And, yet, obviously, there is a lot of
interdependency there.
What is your assessment of that?
Ms. Williams-Bridgers. I am not familiar with efforts by
the European Union specifically but what we have seen is not as
much regional cooperation, not as much of the international
cooperation as we think is necessary in order to provide
assurances that the interdependencies that you refer to are
adequately addressed.
That is why we are calling for the Department of State to
work with international organizations that have already engaged
on a regional basis across national boundaries to facilitate
that type of discussion.
Vice Chairman Dodd. Has there been any regional assessment
in Europe that you know of? I know each country is looking at
it, but I mean has there been anyone that has looked at this
and said that despite France's assessment that it is in very
good shape, the Gartner Group has it in good shape, for
instance, that the utility structure, the grids and not every
country is in the same, even by its own assessment, in the same
shape, that from a regional perspective among the highly, at
least the most highly industrialized countries is a problem, do
you know?
Ms. Williams-Bridgers. I do not know if there has been a
regional assessment conducted by the European Union. I do know
that within certain professional organizations, such as the
International Maritime Organizations, which have memberships
that represent owners and operators, that represent
underwriters for hull insurance companies that provide
institute for hulls and machinery, and for insurers of cargo
and cargo containers that are in ports and terminals and the
like, that they have done those type of international
assessments but I am not certain of the European Union.
Vice Chairman Dodd. Last, I just am curious. In the less-
developed countries one of the States, someone said about
Russia--I do not have this quite right--but that you should not
worry too much because it was never a question of them being,
having reached a level of sophistication and, so, the Y2K issue
is less of a problem. Now, I think that is somewhat facetious
because, obviously, they were.
But as soon as you start talking in Africa, for instance, I
saw a stunning statistic yesterday. The city of New York has 7
to 8 million people, and it consumes more energy on an annual
basis than the 780 million people do in all of the continent of
Africa in a year.
To what extent does the lack of development in these
countries, in the underdeveloped countries, pose less of a
problem, to the extent they are still using pre-computer
methods for moving goods and services and the like.
Ms. Williams-Bridgers. Certainly in those countries which
are less dependent or have only recently become acquainted with
the use of computers their risk of Y2K-related failures is much
less because they can easily revert back to manual operations.
However, in Africa, our concern there is that 76 percent of
the sectors are facing a medium-to-high-risk of Y2K-related
failures. Seventy-six percent of the energy sector and all
other sectors depend on energy. There is a huge humanitarian
concern, also, for aviation and for those interfaces that the
American traveling public or anyone else traveling through
Africa, South Africa, Johannesburg, is a major hub for air
traffic, then we have concerns about their inability or the
status of their compliance for Y2K.
Vice Chairman Dodd. Very good.
Thank you, Mr. Chairman.
Senator Smith. Thank you.
Senator Lugar?
Senator Lugar. Thank you very much, Chairman Smith.
Ms. Bridgers, in your statement you discuss on page 11 our
Y2K assessment suggests that the global community is likely to
experience some Y2K-related failures in every sector, country
and region. That is an awesome statement on the face of it.
Every, single sector, country and region, some degree of
failure.
So, the logical point then is, as you mentioned, work is
underway around the world developing contingency plans to
ensure continued functioning of governments, quite apart from
businesses and so forth.
It just simply strikes me that--and I do not doubt that
there are lots of contingency planners doing this--but there
are several levels of this. For example, with our own
government maintaining some type of communications with our
embassies or with our people that is not for certain. That, at
least, is a very specific way in which the State Department can
try to work out these levels, backups, physically how people
move and see each other if they cannot communicate
electronically or telephonically.
But the reason I raise the question in this way is that it
appears, at least to you and I think this is a correct
assessment, looking at it from the standpoint of the U.S.
Government, that these failures are going to be legion. You can
have charts that you are sort of halfway getting there or
mostly getting there or not getting there at all but,
nevertheless, it either works or it does not.
Ms. Williams-Bridgers. That is correct.
Senator Lugar. And the point it seems to me that we
discovered when we were talking about Russia earlier on was let
us say that as the Russians were protesting 6 months ago but
are not saying so now, that they did not have that many
computers, and now they have discovered that they have quite a
number.
And if the grid system supplying power to the businesses
fails in parts of Russia it is not the same as failing in New
England. The New England failure probably can be covered by
technicians, others who come in. So, that the pause might be
several hours or hopefully not several days. But at least it is
within the reckoning of sort of a closing circle of people who
are available.
But do we have any idea, just physically, how any of these
systems get fixed in other countries? Take Russia, for example,
it is not at all clear that there are a lot of technicians or
other people who understand the power grid system of Russia
sort of floating around from one province to the next. In other
words, there could very well be weeks of gap for people and
untold suffering under those situations.
And it seems to me from the State Department standpoint
this is the kind of analysis that needs to be made because it
will, obviously, affect the people who are involved in a
humanitarian way. But it is likely to affect much more than
that in terms of our foreign policy and what is going on in
those countries, the kinds of pressures on their governments
from people who are not being served or who are in enormous
distress or if there are CNN pleas for help now, they will be
manifest, every 15 minutes, another emergency that Americans
will be called upon to meet, American engineers flying over to
try to fix somebody's grid system.
In other words, I would not say that there is a casualness
about this planning but it seems to me far more relaxed than I
would have anticipated, given the predictions you are making,
that in every country, every sector, every system there is
going to be failure.
Now, granted we cannot pick and choose in advance which
ones and sort of get ready for those but there may, if this is
proportional, be so many that our contingency plan, at least on
the United States level, will have to involve a lot of travel,
a lot of people, a lot of technicians----
Ms. Williams-Bridgers. Yes.
Senator Lugar [continuing]. As we fix up our own situation,
so, that our own Government can be supported and our own
businesses can be supported.
Ms. Williams-Bridgers. Yes.
Senator Lugar. And absent that, extraordinary tragedies.
Ms. Williams-Bridgers. Yes.
Senator Lugar. Now, clue me in as to where the planners
are? How big of a plan is this? And how much of it will be made
available? I mean what kind of safety net assurance is there of
what is going on?
Ms. Williams-Bridgers. Thank you, Senator Lugar.
I would be glad to try to respond to your many concerns. I
think our overall assessments based on our work to date reflect
the magnitude of the problem, the complexity of the problem,
the lack of knowledge that we had about the computer systems,
the interfaces, our interdependencies within country, between
countries and within regions of the world.
I think the approach that the Department of State has taken
to try and educate ourselves about this very complex network of
computer systems has been a very reasonable approach. It has
been a very well-thought out approach.
Let me begin by talking a little bit about what the
Department has done. They began by asking their embassies in a
very well-laid out, methodical survey, to assess host country
government preparedness in every sector that we have discussed
today and all aspects of operation within-country. This was a
massive data collection effort.
Quite honestly, our diplomats overseas are not technicians.
They do not and should not be expected to have the technical
expertise to render these kinds of assessments. However, these
are judgment calls that not only our embassies are making based
on the information that they are collecting but, quite
honestly, they are judgment calls of host country government
officials about where they stood at points in time over the
past year.
Once all that information was collected, it was then
combined that with information that we had collected, from
other sources, and other government agencies that had conducted
similar data collection efforts. We are now in the process of
compiling a massive data base that the intelligence community
is analyzing for us.
I think that the efforts that the department now has
underway to build a response capability and information
collection system where information will be coming in from our
embassies as the clock rolls over will be the true test for the
U.S. Government. Having agencies and all representatives of the
departments' bureaus centrally located to collect that
information on a 24-hour basis from our embassies addressing
questions such as: Where do you stand now? Is the water
running? Are the lights on? Is electrical energy being
supplied?
The embassies between now and the end of the end of the
year are developing and implementing contingency plans that
they soon will be testing. Everyone will know how to react
should there be any failure or catastrophic failure over
several of the sectors.
With regard to Russia, I think we are learning much more
about Russia and the electrical power plants in Russia, and the
nuclear power plants that supply the electrical power grid. The
Department of Energy, as I understand, has just recently
surveyed the four different types of nuclear power plants in
Russia and is getting much more specific information about how
they operate.
The Department of Energy has been engaged in a very focused
initiative, as you may know, with Russia and the Ukraine and
Eastern European bloc nations to educate them, provide
technical assistance, and to bring them back here to the United
States so that they can see how we are going about developing
our contingency plans in our nuclear power plants.
I think this is an example of very good cooperation that is
greatly needed around the world and in different sectors.
Senator Lugar. Well, just to test this out a little bit
more. You mentioned you can do things manually. In other words,
the computer fails and you can use pen and pencil. You can
carry your papers down the hallway instead of doing e-mail. So,
there are ways, I suppose as rudimentary as they are, that
bureaucracies can continue.
But then you isolate this into the power grids, into
telecommunications?
Ms. Williams-Bridgers. That is correct.
Senator Lugar. In other words, these are things beyond the
capability of the person physically to manipulate.
Ms. Williams-Bridgers. That is correct.
Senator Lugar. Or to go and see somebody, it is systematic
failure.
Ms. Williams-Bridgers. We are quite concerned about
disruption of generation and transmission of electrical power
in Russia, specifically. The Department of Energy, based on its
assessments, believes that there are adequate backup systems
right now for generation of electricity in the nuclear power
plants. However, if the monitoring and processing systems for
the nuclear power plants fails for more than several hours, and
if the excess electrical power generating capacity fails then
we are facing safety concerns. We are facing failures that are
going to be very, very difficult to deal with.
So, you are quite right, in some sectors we cannot simply
flip back to manual operations but what is most important for
us to do now is to plan for contingencies, to plan for systems
failures, and how to define we respond to a crisis situation
should it occur?
Senator Lugar. Mr. Chairman, let me just make one more
point.
Senator Smith. Sure.
Senator Lugar. My understanding is that essentially the DOE
has focused on safety as opposed to operations. There is a big
difference. You know, we really cannot resolve that here today
but we have been concerned really about blow-ups----
Ms. Williams-Bridgers. Yes.
Senator Lugar [continuing]. About a horrible situation, as
opposed to the mundane but very essential things, in terms of
individual people in Russia or elsewhere. And I am not certain
we are going to get beyond that in terms of the contingency
plan.
Now, I may be wrong, but that is why I raise this openly.
It seems to me we may be giving an impression that is too
optimistic. Safety is one thing so that we do not have a
nuclear event.
Ms. Williams-Bridgers. Yes.
Senator Lugar. But operation is something else, getting the
thing running, so it heats houses.
Thank you.
Ms. Williams-Bridgers. Thank you.
Senator Smith. Thank you, Senator Lugar.
I believe I heard when this committee first began holding
hearings that the Russians generally were viewing Y2K as an
American plot to get them to buy more Western or U.S.
equipment. From your testimony today that clearly has changed
and that they are working aggressively to remediate as best
they can. Is that accurate?
Ms. Williams-Bridgers. From our indications and
conversations with Department of Energy officials, the Russians
have expressed clear interest in getting technical assistance
and participating in workshops that Department of Energy has
initiated and in visiting here to the United States to view how
we conduct our contingency planning.
Senator Smith. Good to hear it.
One final question. Do you know when the State Department
plans to release country-specific information related to Y2K?
Ms. Williams-Bridgers. Our embassies are in the process now
of finalizing all of the information that they are collecting
from embassies and by next month our embassies have been
instructed to meet with host country governments to inform them
of concerns that we have about their host country's status of
Y2K readiness. In September the department plans to issue
country-specific information in the form of travel advisories
for all Americans.
Senator Smith. I assume that they are anxious to receive
that evaluation and given the strength of the American economy
that report is going to be received by them, acted upon, I
would assume be important to them.
Ms. Williams-Bridgers. By the host country governments?
Senator Smith. Yes.
Ms. Williams-Bridgers. There have been ongoing discussions
between embassy officials and host country governments. Some
embassies have initiated what we consider to be best practices
of working collaboratively with other embassies, by holding
forums, and informing the American community there, informing
American businesses, including small and medium-sized
enterprises. We are most concerned that the Department provides
the American public with information on host country Y2K
readiness and on contingency plans that other businesses or
international organizations are making to address their
problems.
There has been an ongoing dialog with host country
governments for some months now.
Senator Smith. I think it will undoubtedly have a powerful
impact and a beneficial one because I think what drives foreign
corporations is the same thing that drives U.S. corporations,
that is the interest in serving customers, producing products,
providing services to the end that they can make a profit.
Ms. Williams-Bridgers. Yes.
Senator Smith. They do not make a profit if they do not fix
this problem.
We thank you very much for your second appearance to this
committee. It has been very helpful and Ms. Williams-Bridgers.,
we are grateful to you.
Ms. Williams-Bridgers. Thank you very much for having me.
Senator Smith. We now invite our second panel to come
forward.
We have Mr. Ron Balls, an Associate Deputy Assistant for
International Affairs of the International Telecommunications
Union, an international organization that coordinates global
telecommunications networks and services.
Following Mr. Balls, will be Mr. Gary Beach, publisher of
CIO Magazine, the leading publication for chief information
officers.
Mr. Balls, we welcome you.
STATEMENT OF RON BALLS, YEAR 2000 TASK FORCE CHAIRMAN,
INTERNATIONAL TELECOMMUNICATION UNION
Mr. Balls. Thank you, sir.
Before I commence my testimony, can I make three
observations?
First, I am not the Associate Deputy Assistant for
International Affairs of the ITU. The first time I have ever
seen that is when I saw this piece of paper this morning. My
day job is making sure that the British Telecom's network is
Year 2000 ready. The ITU work is in addition to that, sir.
Second, reference earlier on to the European Union, the
European Union is coordinating matters. If somebody gives me a
business card later on I can give them the contact point. It is
Sandra Callagan in DG-3.
My third point, sir, is that being English, as is obvious
from my accent, and not being familiar with your procedures, I
guess the lights on the top table are timing devices.
[Laughter.]
Senator Smith. Let me apologize----
We usually ignore them so if you do, too, that would be all
right. [Laughter.]
Mr. Balls. I was going to say that as it is the first time
you have had ITU representation here and as the traveling time
for me to be here is about 18 hours, 5 minutes seems scant
time, so, I will probably go through my testimony.
Good morning, gentlemen. On behalf of myself and all of my
colleagues on the ITU Year 2000 Task Force, I thank you for
this opportunity to address the U.S. Senate Special Committee
on the Year 2000 technology problem.
You already have the written statement and I will try and
build on that and provide some additional information where
relevant. Let me advise you initially that the task force is
made up of people from telecommunications companies worldwide,
who are freely giving their time to this issue.
These people invariably have demanding Year 2000 positions
with their own companies but recognize the need for action on a
global basis. They have support from their own companies both
in terms of the time taken and also financial support for task
force activities. They also do a lot of work in their own time.
My visit to Washington to attend this session is not supported
financially by the ITU but by my own company. There is one
full-time ITU professional involved who has a primary concern
for the underdeveloped nations.
Members of the task force, drawn from many of the largest
telecommunications operators and also vendors and other
organizations are confident that no major disruption to
telecommunications will occur as a result of the Year 2000
issue in the developed part of the world.
The international carriers are well advanced with their
Year 2000 programs. Many have completed their equipment
upgrades and now are in the business continuity planning stage.
Where difficulties remain, they are largely confined to the
less developed economies and have been working hard in these
regions to advise and assist the operators to achieve as much
as possible in the time remaining.
Covering the background. The task force was set up in March
1998 following pressure on the ITU from a number of major
operators, including BT, Telia and INTELSAT and in brief it is
to raise the awareness of the Year 2000 and related issues;
related issues being the GPS rollover, the risk dates of 9-9-
1999, 10-10-2000, et cetera, amongst Telecom's operators, to
understand the compliance position of Telecom's operators and
to promote the sharing of knowledge, best practices, advice and
support.
The ethos of our work is one of leaving behind all
competitive aspects and recognizing that the only competitor in
this context is time, itself, and operating on the basis of
awareness, sharing, cooperation, and information flow. The
information flow being achieved through the website, mailings,
documentation, meetings and workshops.
The task force has grown to a mixed functional and
geographic grouping as illustrated at attachment B in the
submission. The geographic groups being formed to provide local
support.
To illustrate the global involvement of the task force, let
me advise you of where the Chairs and Vice Chairs come from.
The Task Force is chaired by BT, its Vice Chair is Telia/
Sweden. The Information Management Group is chaired by
INMARSAT, its Vice Chair is Telstra from Australia. The Inter-
Carrier Testing Group is Chaired by BT, its Vice Chair is Cable
& Wireless. Contingency Planning now Chaired by Telia,
previously by Media 1 Labs, with involvement from British
Columbia Telecom, BT, Telia and INMARSAT.
The Development Group Chaired by the ITU, the Vice Chair,
South Africa. The Early Warning Group Chaired by GT and
Ameritech combined, with support from Telstra and Telecom/New
Zealand. The North American grouping is run by the U.S. Telco
Forum led by GTE and the Canadian Telecom Forum led by Stentor.
The Pacific Partners Group by Telstra, the Arab Nations by
Jordan Telecom and Egypt Telecom.
Let me now cover some aspects for outreach. The Task Force
is operated in the spirit of cooperation and with a recognition
of the mutual benefit to be gained by the pooling of resources
and expertise in the face of this challenge. High levels of
cooperation, both across countries and between competing
operators in the same country, have been achieved to a level
probably unprecedented before.
We have approached the issue through a combination of
measures that I will outline and you will see from Attachment A
to the submission that many meetings have taken place and
additionally a considerable number of audio conferences.
Covering some of the activities, initially the compliance
questionnaire. We prepared a Year 2000 compliance questionnaire
issued in April 1998 to all ITU members. To date, the Task
Force has received over 530 responses, from 150 countries,
representing more than 450 operators and carriers. An extract
of what is currently on the public side of the website is at
Attachment E.
On a simplistic basis of counting a country, if the
dominant operator or grouping of operators responded, then
response rates to date are Africa, 58 percent; America as a
continent, 76 percent; Asia Pacific, 63 percent; Austra-Asia,
100 percent--well, that's easy, because there are only two
countries--the Arab Nations, 73 percent; Europe, 80 percent;
overall a figure of 70 percent.
The summary results of the questionnaire are available on
the public section of the website, while the full questionnaire
results are available through the site's Closed User Group. The
Closed User Group access is only available to Telecoms,
Operators/Carriers, who have completed the questionnaire and,
so, it is an incentive for them to be involved with the group.
An electronic update facility has been provided to enable
operators to update their information. This is the only source
of data that we are aware of which provides a summary of the
overall Year 2000 position of Telecom Operators which is in the
public domain: That is, available to all who have access to the
World Wide Web, be they operators or customers.
As such, this is referenced extensively by operators,
customer groups, and Year 2000 sector bodies. Recognizing this,
over the final 5 months there will be a further drive to update
the information.
We have conducted regional workshops in different parts of
the world with the support of industry and other organizations
with an interest in assistance to developing countries, notably
the World Bank infoDev Program. The objectives of the workshops
are to generate awareness about implications of the problem,
initiate and strengthen information sharing between operators
with established programs and developing countries, promote and
strengthen effective supplier relations, and provide
information on standards, tools, techniques, et cetera.
In addition, a number of workshops that focus on specific
issues have taken place, including contingency planning and
business continuity. The participants in the workshops have
come from administrations, operating agencies, major vendors,
international and regional satellite organizations and the
World Bank.
The workshops address a wide range of issues which are
central to the discussion of the Year 2000 program including
testing, quality assurance, management of supplies relations,
and contingency planning.
The vendor representative presentations have commented on
the status of their own compliance of products, and their
capacity to meet operators' needs. Workshop dates, locations,
numbers of attendees are in Attachment D of the document.
At the workshops, operators have generally provided an
update of their expected completion dates. In a number of
instances this differs from their questionnaire. We use that
information to assist wherever we can. Regional subgroups have
been established to concentrate on specific areas of the world,
including the Arab countries, the African countries which are
French-speaking, the African countries which are English-
speaking, Latin America and Asia Pacific.
All of these sub-and-regional groups have held meetings and
are pursuing their own activities via, some by electronic
communication and the results of their work are regularly
posted on the ITU website. In addition, the activities of the
Year 2000 Task Force have been published and promoted through
web pages, through regular articles in the ITU's magazine, ITU
News, which has a wide distribution.
We have prepared a comprehensive Year 2000 Guide. This
provides Telecom's operators with a high-level overview of the
process of dealing with the Year 2000 issue. This has been
widely distributed to ITU member States, Sector Members,
National Year 2000 Coordinators, as well as international and
regional bodies. The Guide is available on the website in four
languages: English, French, Spanish and Russian. The Guide
supplements the other activities that we have been taking.
The ITU's work covers all segments of telecommunications,
representing operators and suppliers. Experts give generously
of their time and expertise in participating in these.
Significant, highly valued, in-kind contributions have been
received from the Government of Australia, BT, Bell South
International, Cable & Wireless, Deutsche Telecom, INMARSAT,
INTELSAT, South Africa Telecom and Telia, and the
Administrations of South Africa, Morocco, Egypt, Australia,
Brazil, the Russian Federation, Poland and Jordan. Also, we
have extensive help from telecom organizations such as ASETA,
APT and RCC.
The financial contributions received from a number of
operators and vendor organizations are placed in a separate
project account and the contributory sponsors are provided with
periodic progress reports.
We have cooperated with the International Year 2000
Coordination Committee, led by Bruce McConnell. We have given
presentations at both United Nations' meetings, 11th of
December 1998, and 21 and 23 of June 1999. We have hosted a
meeting in Geneva, the 3-4 of May of International Sector
Coordinators, including international civil aviation
organizations, international air transport, international
maritime, international energy agency, Global 2000, Joint Year
2000 Council, and the World Bank.
We liaise regularly with other bodies. I sit on the
External Consultative Committee to the Joint Year 2000 Council
and we provide input on telecommunications. We maintain a very
close linkage with Global 2000 Group and I provide an input to
their chart there that you have displayed.
You must recognize that their chart there is based on
information in the public domain. That is a very germane point
in that two of the countries shown as red in the telecom sector
of that chart have already tested internationally. The question
is they have not put that information into the public domain.
That is the difference.
We also liaise quite extensively with customer groupings,
including the European Virtual Private Network Users Group and
the International Telecoms Users Group and the SIA in the U.S.
We provided expert support to a number of different countries
and we will be providing more in the future.
Turning to the impact of the Year 2000 on
Telecommunications. As I said earlier, it is unlikely that
there will be material disruption to the Telecoms Network in
terms of core connectivity in the developed nations. There is
very little date information passed across the interfaces in
real time.
Major operators have undertaken extensive tests, many using
the five-layer model, with the final layer being inter-carrier
or international testing. To clarify the five layers, let me
just run through them. The first of these is vendor testing.
Any component, we expect the vendors to test it before they
deliver it to an operator. We then expect the operator to do
testing at both a component level and at an end-to-end level;
so, they will test a switch and then they will test it in terms
of a voice call.
The third layer is inter-operator within a country. So,
typically administrations within the U.S. will test with each
other. The fourth layer, which depends on the network
structure, is testing with carriers. So, it is relevant in the
U.S. where you have the likes of MCI World Com, Sprint, AT&T.
It is not relevant in most European countries.
The fifth layer is the inter-carrier international testing.
This has been a primary focus of the work of the ITU. A
considerable number of operators have been involved in this
activity carrying out a comprehensive range of tests. The broad
strategy is to ensure that tests are carried out involving each
type of international gateway switch and with as much global
reach as is possible within the time and that facilities will
permit.
We have identified 21 different international gateway
switches from eight different vendors and are working our way
through these as logistics permit. We have already covered the
major ones. There are three from Lucent, four from Ericsson,
one from Nokia, three from Siemens, four from Nortel, one from
NEC, three from Alacatel, and one from Marconi. The major usage
switches have been tested and no Year 2000 anomalies found.
The detail in Attachment C is a condensed version of the
testing that has taken place so far, and not referred to but
operators who have been tested include KDD from Japan, and PLDT
from the Philippines.
Our future plans, as well as those listed in the
attachment, also include Angola--yes, I did say, Angola--
Indonesia, New Zealand, Russia, the ComStar operator in Russia,
Belgium, Macao, Shanghai, and Brunei, and the list continues to
grow.
Having said all that there may still be difficulties in
connecting calls to some operators and there may be some
consequential effects due to traffic being diverted via other
routes. However, the Task Force remains with the view that
major players and their major trading partners are not likely
to see a significant disruption to service as a direct result
of the Year-2K. But we do have a concern for all the developing
nations.
An impact which does require some attention is the
possibilities of congestion at the time of the century date
change with increased level of calls and customers checking for
dial tone.
The status of the preparedness by region is shown in the
written statement, and I will not go through that.
We have, obviously, given attention to contingency planning
and business continuity. And following the awareness phase, a
major element of the work program has related to this. The
subgroup concerned with this has prepared material covering the
strategy, business processes, impact analysis, templates, a
generic business process for Telecoms operators, glossaries of
terms, and slide packs within company presentations and these
are all on the website.
Worked examples for business continuity will also be placed
on the website later this week and a publication, similar to
the Guide I referred to before, is being prepared.
Activity training programs are planned in different parts
of the world and an initial session on business continuity was
held in Jordan on the 20th-to-22nd of April 1999. A second
workshop was planned for the CIS region in Siberia, the 13th-
to-15th of July at the invitation of the Russian
Administration. We have postponed this because we do not have
the relevant attendance there. We want operators there, not
ministry officials or government officials.
The main objectives of that program are to provide
operators with the background and methodology on how to develop
contingency and business continuity plans and demonstrate these
through practical workshops designed specifically for this
purpose, to provide a forum for discussion between operators
and major suppliers, and facilitate information exchange on the
compliance status.
Where appropriate, the training program will also cover
testing with the objective of sharing information experience
about conducting tests at component, cluster and service levels
and inter-carrier testings.
Further guidance on issues of traffic routings are planned
to be placed on the website next month. We have also looked at
early warning. The Asia Pacific Region is the key to the early
warning system being established, using a follow-the-sun
approach to the transition period.
Between New Zealand and Thailand there is a 6-to-8 hour
window of time within which 90 percent of all switch types and
90 percent of all transmission equipment will be in operation.
This region, therefore, represents a microcosm of global
telecommunications within the 6-hour window and will provide
the rest of the world with valuable data on any difficulties
that might emerge.
The Early Warning Group has plans in place to monitor the
position through each of the 24 time zones adopting a positive
reporting approach 30 minutes after midnight within each time
zone and at noon on the 1st working day within time zones.
The information will be held on a data base at the National
Coordination Center in the U.S. and participating operators
will have input to this and access to information.
Let me conclude by covering outstanding issues. The
workshops have been successful in the objective of information
exchange in the programs in various countries. The presence of
supplies has provided a good opportunity for both parties to
discuss problems associated with out equipment and systems.
The workshops have established that an awareness of the
problem is rising. Several countries have national planning
mechanisms in place. Even in the absence of national programs
Telecoms operators have begun addressing the issue though it's
a matter of concern that the lack of national planning might
aggravate interdependency problems.
In some developing countries progress is typically
constrained by factors including lack of commitment at the
highest level in the organization, sound project management,
shortage of skills at various levels, lack of facilities such
as a testing environment, lack of funds and low supplier
response.
In view of the likely demands for assistance over the next
few months, the ITU has requested operators with established
programs to provide expert resources for short periods to be
deployed in the development countries. While it is difficult to
accurately estimate the likely demands that may arise in the
future, it is inevitable that this will be a growing demand and
some of this will be assistance in next year to resolve the
difficulties which go over the century date change.
The growing list of countries requiring assistance could
become a bottleneck with the expertise not being available to
us. The ITU is seeking more support from those countries and
operators that are more advanced and have well-established
programs in place. Specifically, we need expertise on business
continuity planning, particularly fluent French speakers and
fluent Russian speakers.
Gentlemen, thank you, for listening to me, and I will
endeavor to answer any questions that you might have.
[The prepared statement of Mr. Balls can be found in the
appendix.]
Senator Smith. Thank you very much, Mr. Balls, and we do
appreciate your traveling as far as you have to be here to
present us with this perspective. Briefly, you indicated this
chart we are relying upon is based on public information. I
think your implication is that there is a lot being done that
isn't public and the picture is brighter than that would
suggest.
Mr. Balls. Absolutely.
Senator Smith. Thank you.
Mr. Balls. Global 2000 would be the first people to admit
that because their criteria is, is it in the public domain?
Senator Smith. Very good.
Senator Lugar, do you have a question?
Senator Lugar. No, I do not.
Senator Smith. Senator Bennett?
Chairman Bennett. No. I apologize that I was not able to be
here for the entire panel. Mr. Beach, I have read your
testimony and, of course, I heard a good portion of Mr. Balls.
So, I have no further questions.
Senator Smith. Mr. Beach, we welcome you and invite your
testimony now.
STATEMENT BY GARY BEACH, PUBLISHER, CIO MAGAZINE
Mr. Beach. Thank you, Mr. Chairman.
Before I start, I would like to comment on something that
Senator Lugar mentioned at the end of Ms. Bridgers' testimony,
which I think was very well put. And he was asking about, what
I heard, the need for international help in possibly developing
countries helping those who needed the help. And there is a
digital Peace Corps, so to speak.
It is called the International Y2K Cooperation Center and
it is a joint effort by the World Bank and the U.N. I am part
of that steering committee. And I am hoping that members of the
press here might see me after because we need some help in
terms of mentioning this around the world. We have identified
40 countries so far who have asked for help and have volunteers
that we are mixing and matching.
My name is Gary Beach and I am the publisher of CIO
Magazine. Our readers work in major corporations, primarily
Fortune 1,000, Federal State and local governments. We are
located near Boston. We had nothing at all to do with, of
course, Boston being one of the two cities being compliant with
Y2K. Mayor Minnea has a smile on his face.
In June of this year, the reason I am here, is that a
public interest coalition of CIO Magazine, Dr. Ed Yardeni's Y2K
Center and the Information Systems and Audit and Control
Association [ISACA], conducted a Y2K experts poll. The poll
interviewed experts in an effort to help engage the public and
their policy officials assess the Year-2K readiness of
organizations around the world.
I am hoping, Senator Lugar, you were asking earlier about
we are groping with this uncertainty, that some of the data
here today will address that.
The poll was conducted in June via the Web and e-mail
invitation from the three members to recipients asking only
those who are professionally and actively involved in Y2K
projects to respond. The responses basically came from three
groups. A third of them were CIO's, a third of them were
business managers, and a third were financial individuals. We
received 892 responses and at a 95 percent competence level,
the data in that survey, which you all have has a plus or minus
sample error of about 3 percent.
The majority of responses were from large, U.S.-based
companies, 55 percent, and 45 percent represented firms from
outside the United States. It is interesting to note that 61
percent had a 1,000 or more employees. So, these are large
companies.
Now, the poll is really a snapshot of Y2K readiness among
large, global firms, with an incredible number, 1,300 trading
partners. We have heard about the supply chain earlier today.
This data represents about 1,300 trading partners connected in
a worldwide electronic domino system.
Now, I would like to present the major findings of the
survey which is in the full testimony. In our first chart here,
we asked respondents when they expected to finish all phases of
their projects, including testing. Responses indicated that
while the project was moving along it is not completed and 80
percent reported they were more then three-quarters complete.
However, 33 percent admitted that they were behind schedule
and, in addition, and it is here on the chart, 8 percent, or
almost 1-in-10, said they will not complete their Y2K work by
December 31 of this year.
And I would also like to emphasize that 52 percent who
claim that they are going to finish by September 30 of this
year and the 16 percent who say they are going to do it by
December 31, I believe Vice Chairman Dodd last week, in terms
of talking about the cities that expected to complete their
work in the fourth quarter, calling it a fantasy world. I think
any large company completing work in the last quarter is being
unrealistic.
So, I mention, of course, remembering these are not small,
medium-sized companies, these are large global firms. And
nowhere have I seen data until this poll that quantifies the
percentage of large firms that admit they are not going to be
make this turn of the century deadline, which just
tangentially, I think--and Ms. Bridgers focused on this--as we
approach Y2K, I think for a while we thought we could fix this
situation. We are well beyond that. And the work of this
committee has highlighted this situation very, very well.
And I would just emphasize, once again, the aspects of
contingency planning. We have to, as a country, as a world,
move to contingency planning now.
So, that leads to our second slide here that we have in
terms of contingency plans are lacking. We asked this group
their status of contingency plans. And 49 percent have a plan
and 50 percent have no formal plan. One are still thinking
about it, I assume.
However, the thing that I found interesting is if you had a
contingency plan in place now, 60 percent of those companies
have already implemented it. They have seen the urgency of Y2K.
The next slide is on vulnerability in the supply chain. We
asked firms about their supply chain readiness. We found 12
percent--you have heard this before in the committee--but we
found 12 percent of large companies were verifying their
business partners' readiness by conducting onsite visits. That
is good. And 48 percent of the respondents--we were talking
about this earlier with Ms. Bridgers and asking how the, what
is the verification of the status of different countries and
this is just tying into that--but, 48 percent of our
respondents in this survey are just sending out questionnaires
followed by a telephone call.
And 20 percent send out questionnaires with no telephone
follow-up and 13 percent are simply having informal
conversations with their partners about the state of the
readiness. And I submit, Mr. Chairman, that Y2K readiness is
not a topic to be relegated to informal conversations.
In fact, my face-to-face conversations--I spend a lot of
time with CIOS--and my face-to-face conversations with these
men and women, you ask them how are you doing with Y2K and they
will look you in the eye and say, we are doing the best we can,
and knock wood, I think we will be OK. You ask them about their
supply chain partners, and their eyes go down, and they pray to
some extent.
And I think three reasons are for that in terms of their
readiness. No. 1, they do not have the time--remember 12
percent are actually visiting sites--they do not have the time
to go out and visit 1,300 trading partners. That costs an
expense and third the logistics of verifying those partners is
immense.
Too many of these businesses at this very critical
juncture, 162 days to the Year 2000, are relying on trust and
trust that may or may not be well founded. Globally speaking,
supply chain readiness poses its own set of problems. We talked
about this earlier where a lot of the businesses you are about
to hear from might have some leverage with partners in their
supply chain that are here in the United States but they go
outside they have less leverage with PTT's in other countries
and what have you. So, in many cases, they are the only
alternatives for telecommunications service and electrical
service.
So, the next slide is on mission critical software. The
supply chain, which is heavily interconnected, may seriously be
impacted by incomplete or no-delivery of Y2K compliant mission
critical software. I found it amazing that 35 percent of these
large firms said they are still waiting, 162 days away from
Y2K, they are still waiting for Y2K compliant versions of
mission critical software from third party vendors. And I will
not bore the committee with what happens if you get version
five and you are back at version three, and you plug this in
and it may not work.
We also asked respondents if any of their mission-critical
systems were expected to fail or malfunction. And you hear lots
of testimony. This is the data point that really impressed me.
We found--using a word, I think, Senator Smith, you, mentioned
earlier--daunting. The daunting statistic from this survey for
me was these large firms expect 3 percent of their mission-
critical systems or applications to fail because of Y2K, 3
percent.
Moreover, 3 percent said that they expect major problems in
telecommunications service and 2 percent say they expect major
problems in electrical service.
So, as we come back to the call to action. We heard from
Ms. Bridgers, she pointed out the contingency planning. I would
strongly encourage this committee to encourage all businesses
in America that by September 30 of this year they have a
contingency plan in place. Possibly the committee could set up
a frequently asked-question section on your website. You might
already have done to do this and this information could be
shared on-line.
Chairman Bennett mentioned, in opening the hearing today,
talking about sustaining America's economic strength. I will
leave you with a positive thought on Y2K. And I hope my other
ones were not negative. This is data, which by the way, we are
repeating in September. So, we will deltas on all this data.
That akin to what the oil crisis did for fuel-efficient
cars. We all suffered pain in the mid-1970's, but out of it we
came out with more fuel-efficient cars. What Y2K may do in
terms of sustaining America's economic strengths,
industrialized countries and companies that you are about to
hear from have done a technology inventory of legacy systems,
legacy applications and they have cleaned house. They have
brought in new software, new hardware, and this will, I think,
be one of the other legacies of Y2K.
And I am sorry I went over but, thank you so much for your
time here today.
[The prepared statement of Mr. Beach can be found in the
appendix.]
Senator Smith. Thank you very much, Mr. Beach.
You have called on this committee to provide guidance on
development contingency plans and we hope you and everyone else
listening to this hearing are aware of the excellent guidance
available on-line at the GAO website. That is WWW.GAO.gov.
Senator Lugar, do you have a question for either of our
witnesses?
Senator Lugar. Let me just comment. I thought the final
comment you made, Mr. Beach, was very significant, that we are
looking, obviously, in this committee at the downside of this,
which is catastrophic for some businesses, for some countries
and what have you. But the other aspect of it, the clean up
that you are mentioning probably is significant. It may already
be manifest in some of the operations of American multinational
corporations now.
I am just impressed in a way the rich got richer and the
poor got poorer, those who are well informed, well managed
really have sort of an on-the-ball attitude probably are going
to progress beyond their competitors who never understood
exactly what hit them in his.
Now, usually when that happens, sadly enough, the losers
come to the Government, here, and want relief and that happens
all across-the-board in American life. But I suspect, you know,
this is worth watching and probably you will be in your
magazine and elsewhere because the upgrading of our systems and
the new knowledge that CEOs as well as technicians have of this
is significant.
And probably a real boost for us if we somehow get through
the first of January.
Mr. Beach. If I could just comment, Senator Lugar. I had
the opportunity to visit Bangalor, India, at the end of May. We
are starting a magazine there. And it is also cuts to what
Chairman Bennett was saying in terms of sustaining America's
economic growth that developing countries--Senator Dodd talked
about how a third of the world lives in China, India and I
forgot the third country he mentioned--those countries do not
have the legacy problems that our country has.
So, we have got to get it right. We really have to focus on
upgrading our systems once we get beyond the Year 2000 as
quickly as we can to sustain our country's economic growth in
this dot-com economy.
Senator Lugar. That is a very good point because World War
II demolished the economies of many nations but they did not
have the legacy left over. It was gone. And, so, that the
infrastructure boost that happened there made a big difference
in many cases.
We are fated to have a lot of hardware left over that may
not be very good but it is an encouraging point. And I just
simply wanted to mention that. There are incentives for people
to do this in addition to trying to forestall a dire emergency.
Senator Smith. Senator Bennett?
Chairman Bennett. Thank you very much to both members of
the panel.
One quick question to you, Mr. Beach. We have had Dr.
Yardeni testify both before the subcommittee of the banking
committee that got this all started with Senator Dodd and me.
And then we have had him testify before this committee. He is
perhaps best known for his percentage prediction with respect
to a worldwide recession.
You are a partner of his in producing this report. Can we
ask you the question: What does he now think the chances are of
a worldwide recession?
Mr. Beach. I think that is a fair question, Mr. Chairman. I
was with Dr. Yardeni in New York last month when we released
the results of the survey and that question was asked to him
from the audience. He has backed off on the--I think the
specific percentage was 70 percent probability of a worldwide
recession.
Chairman Bennett. Yes. At one point it was as high as 70.
Mr. Beach. He has backed off on that. The area that he is
somewhat concerned about now is the possible disruptions in
inventory buildup as we lead to December 31, where firms--and
you will hear from these firms in several moments--may be
stockpiling goods and services. We found some evidence of that,
and it is in the report. I will not go through it now. And, so,
he is expressing some concern that there could be some
disruptions in a smooth economic flow. But I clearly believe,
and I cannot speak for Dr. Yardeni, that he has backed off on
the 70 percent probability of a global recession.
Chairman Bennett. Well, all of us have had the experience
of having our own words quoted back to us. I have constituents
who are very upset that I am no longer as alarmed as I was 18
to 24 months ago. And when I say we are going to be in fairly
good shape, they say, no, we are not, listen to what you said.
And they quote my own speeches and say I am misinformed now.
[Laughter.]
And I say, well, we just did better in the last 18 to 24
months than I thought we were going to, and I assume that both
of you have that sense, that we have accomplished more than
maybe we thought we were going to be able to when we first
began to get fairly serious about this.
Is that a fair summary of both your positions?
Mr. Balls. I think that is a fair summary and I think what
has also happened over the last 6 months or so is--particularly
in this telecom sector--is that a lot of the activity that has
been going on has been coming into the public domain. I mean
certainly that is my view of South America, where we knew very
little about it. But, you know, having been there twice now,
and having talked to the people and persuaded to put
information in the public domain, they are now responding to
it.
And I, very often, now when talking to operators will show
them newspaper articles which say typically, Telecom Egypt is
not very good. And they say, that is not true. I say, I know it
is not true. Tell the world it is not true, give them the
information. It is putting things into the public domain.
Chairman Bennett. Thank you.
Senator Smith. Senator Bennett, your comment reminds me of
a prayer my mother used to remind us of as children that, Bless
me today, oh, Lord, that my words may be soft and gentle for
tomorrow I may have to eat them. [Laughter.]
We thank you both, gentlemen, for your testimony and your
participation. We are delighted to invite up now our third
panel. This panel consists of Mr. George Surdu, the Director of
Technical Services for Ford Motor Company, whose brands include
Volvo, Mazda, Jaguar, Mercury, Astin-Martin and Hertz.
Also on this panel is Mr. Patrick Roberts, who is the
Senior Vice President for Business Information Services for
Ahold, USA, an international food retailer operating more than
3,700 markets and specialty stores worldwide including Giant
Food in the Washington, D.C., area.
Next is Mr. Kevin Click, Director of Worldwide Y2K
Corporate Compliance Efforts for Philip Morris Companies, the
largest producer and marketer of consumer goods. Its principal
operating companies include Kraft Foods and Miller Brewing
Company producing brand names like Maxwell House, Oreos, Kool
Aid, Kraft Macaroni and Cheese.
Next is Mr. Kevin Haukebo, who is Y2K Program Manager for
Procter & Gamble, the worldwide operations in 72 countries,
manufacturing popular products like Crest, Pringles, Tide,
Pampers and Cover Girl makeup.
And, finally, Mr. Charles Krichbaum, who is the Director,
for the Year 2000 Project for Praxair, which produces and
supplies industrial gases.
So, we will start with Mr. Surdu and we welcome you all and
we invite your testimony now.
STATEMENT OF GEORGE SURDU, DIRECTOR OF TECHNICAL SERVICES, FORD
MOTOR COMPANY
Mr. Surdu. Thank you and good morning.
Before I begin I need to say that Senator Dodd was spot on
in terms of the enormity of this program. When I began this
program back in 1996 with Ford Motor Company I had black hair,
so, we have gone through a little bit.
I want to formally thank, of course, Chairman Bennett,
Senator Lugar, Senator Smith and the entire committee for
allowing Ford Motor Company to provide an update on our
program. Needless to say we are very proud of the comprehensive
program that we began.
As Senator Smith has indicated, I am the Director of
Technical Services and have been the Global Year 2000 program
manager for Ford Motor Company since the inception of the
program in 1996. And I need to emphasize that the program has
been global from the very beginning so, the things that I will
tell you--and I would like to give you some fairly detailed
statistics on where we are in the program--but these are global
statistics. Once I complete the formal statement I certainly
would be happy to answer any questions.
In 1996, Ford Motor Company initiated a formal program to
address the Year 2000 challenge. A senior-level steering
committee was established, co-sponsored by our Chief Financial
Officer, our Vice President of what is called Quality in
Process Leadership and our Chief Information Officer. A formal
Global Year 2000 Program Office was established under my
leadership and a very robust program management process was
created to guide compliance actions across all the impact
areas.
One of the interesting things that we did at Ford Motor
Company which have been mirrored in a number of other areas
including with our suppliers, through the Automotive Industry
Action Group, is the way that we have looked at the company's
business and we looked at it at some unique technology lines.
The impact areas include computer business systems, our
technical infrastructure which is all of our data centers, our
wide-area networks, our local are networks, all the way down to
and including all of our desktops, our plant floor equipment,
our product development test equipment, our suppliers, of
course, our dealers, our affiliates, end-user computing, our
building infrastructure and our vehicle components.
In addition, as we have worked our way through the program
we have continued to monitor the compliance actions of other
impact areas such as all of our transportation carriers,
medical equipment suppliers and customs offices around the
world.
The sophistication of our program has been recognized by
the Information Technology Association of America with a
certification that indicates Ford's program meets the challenge
of best practices, the Y2K best practices standards.
We very early on established stretch objectives on all
these impact areas with the majority of work to be completed by
mid-year this year and fundamentally we are there. We had an
objective to have all of our critical systems compliant which
means that we had them remediated, tested, put back in
production by the end of 1998 and we met that objective. As of
June of this year, in terms of all of our systems 98 percent of
our critical systems, because we added some during this
calendar year, are compliant. We have got a handful that we are
finishing up during the shut-down period. And 97 percent of all
business systems have been remediated, tested and are back in
service.
In addition, two focus areas this year, as we have
completed all of our remediation work, has been around the area
of what we call enterprise-wide testing. Actually plugging in
all of our systems and making sure that all the touch points
are working properly and contingency planning.
Again, I think many of the things you heard this morning
Ford Motor Company has been doing very aggressively.
The enterprise testing will be completed by this September.
We are very far along that way. Again, we are using some of our
shut-down periods to complete some of that work. For plant
floor equipment we have implemented a process to assess
equipment and machinery in more than 167 manufacturing assembly
plants and parts warehouse facilities around the globe.
Presently 99 percent of all of the plant floor equipment
has now been validated that it is compliant. And again, we are
doing some cleanup work during the shut-down period, during the
months of July and early August.
In conjunction with the Automotive Industry Action Group of
America and other industry trade associations around the globe,
like the VDA in Europe, Ford has been participating in a global
supplier readiness program for production and critical non-
production suppliers.
As of this report today about 80 percent of our suppliers
responding are deemed ready. We have a very comprehensive
process to validate that including onsite assessments and
audits that validate the validity of the responses and 100
percent of our supply base are indicating readiness by year-
end. About 10 percent have not responded and additional actions
are underway to validate the status of both these suppliers and
those that go beyond September of this year. So, we have a
magic date no further than September.
Actually, to be honest with you, we have chinned our
suppliers, dealers and affiliates to the same aggressive Year
2000 program we have internally which really takes us back to
June of this year.
A similar program has been established for all of our
affiliates as I said, and as of month-end, June month-end, 89
percent are ready, with 100 percent slated to be ready by
December. Compliance status for some of the other impact areas
include 80 percent of all of our critical product development
test equipment, 97 percent of all of our end-user computing.
So, we have actually gone down not only to the desktop but to
all the applications running on the desktop, all the access
data bases, the Excel Spreadsheets, all of that have been
looked at very, very closely.
And 96 percent of all of our technical infrastructure is
now compliant and we have monitored very closely much of what
you heard today in terms of where the telecommunications
industry is and where our particular equipment is. We have done
a significant amount of testing in that area. Next, 83 percent
of all our end-dealership systems are compliant and 97 percent
of all our physical properties and infrastructures are
compliant. Finally, 100 percent of all of our vehicle
components are compliant both past and present.
As stated in the most recent SEC filing, which we issued
about a week ago, Ford estimates that we will be spending about
$403 million to complete this initiative so we clearly have not
taken it very lightly from the very beginning. That is up from
$375 million. We have added Volvo to our program, of course, we
have made substantial progress, obviously, as we approached our
key dates of June of this year.
I think last year at the end of December, we were at about
$155 million; we are now up to almost $300 million in spending.
This total spending, of course, will be incurred over a 3-year
period. It started about mid-1997 and will take us through mid-
2000. And I say that because we are still going to keep our
resources in place through certainly the February timeframe,
February 28, 29, because in our testing we have tested, we
actually have 12 distinct tests, periods that carry us through
until we feel we are totally compliant. This outlay that I
indicated amounts to about 10 percent of our total information
technology budget.
We, of course, are very confident as to our readiness as
well as the readiness of our affiliates, dealers, and
suppliers, so we may be a bit more positive than some of what
you have heard this morning. However, it is clear that the
interdependence of the entire supply chain does represent the
greatest risk to us.
In particular, an extended infrastructure failure, that is
gas, electric or water, would make it difficult for us to
operate our manufacturing operations. Accordingly, during the
fourth quarter of last year we did begin a very extensive
business contingency planning process for all of our critical
business processes. Most of these plans are now complete and
validation of these contingency plans will be completed in
September. Obviously, we are monitoring very, very closely much
of what you have heard today, the Gartner Group studies. We are
obviously looking at the U.S. Government to provide additional
input. We are validating that input in each of the countries
that we do business with our own people and, of course,
developing plans around that.
In addition, we have created a Global Response Center--in
fact, we launched it July 1--to be used as an information
clearinghouse for the most current status available as we enter
the new millennium. And critical systems are being processed
through an independent verification and validation process as a
final check for readiness. So, although, we have validated all
of our critical systems, assured their compliance, put them
back in production, we are going through an independent IV&V
process here during the middle of the year to make sure that we
have not missed anything, we have not interjected anything as
we have moved the business forward during calendar year 1999.
Finally, a very small number of our employees are being
notified now to serve as onsite or on-call support over the
holiday period to coordinate a response to any unexpected
glitches that may be experienced by Ford or those who rely on
Ford's consumer products and services.
I will tell you as one point of information that we are
very encouraged with our supply base and the work that we have
done with them and their work. We are now transmitting
electronically a Year 2000 transactions to them. In fact,
during January of this year, in our parts and service
organization, we began submitting what we call 10-10
transactions, that is 10-month/10-week forecasts which included
zero-zero in the transactions. We had very, very few issues.
They were resolved very quickly.
And we are now sending electronic Year 2000 related
transactions to all of our production and critical
nonproduction suppliers around the world and have not, at this
point, identified any incidents. So, we are very, very
encouraged at this point of the progress that we have made and
our partners have made.
So, this concludes my prepared statement. I would like to
again thank the committee for the time that you have afforded
Ford Motor Company to present its program and, of course, I
would be happy to respond to any questions.
[The prepared statement of Mr. Surdu can be found in the
appendix.]
Senator Smith. Thank you very much, Mr. Surdu.
I assume with all the resources that you have expended you
have actually found problems and you have corrected them?
Mr. Surdu. Clearly. Clearly.
Senator Smith. And had you not done that, if others are not
doing this, they will encounter significant difficulties.
Mr. Surdu. Yes. I mean this is--clearly we are very
positive on the status and the program but also we are very
focused that this program and this issue is real. We needed to
do this and, in fact, we have found problems in all the impact
areas.
Senator Smith. Why do we not go with the testimony and we
will go next to you, Mr. Click.
STATEMENT OF KEVIN CLICK, DIRECTOR OF WORLDWIDE Y2K CORPORATE
COMPLIANCE EFFORTS, PHILIP MORRIS COMPANIES, INC.
Mr. Click. Mr. Chairman, and members of the committee, good
morning. My name is Kevin Click and I am Director of Corporate
Audit and head of Worldwide Year 2000 Corporate Compliance
Effort at Philip Morris Companies, Inc.
In this capacity I am responsible for overseeing and
coordinating all compliance activities relating to the Year
2000. This includes briefing senior Philip Morris management as
well as the audit committee of the Board of Directors regarding
our Y2K compliance status. My formal submission for the hearing
record describe the Y2K readiness programs underway within our
company.
We have a high level of confidence in our preparations and
our internal business and factory systems are now over 97
percent compliant. However, as the committee is well aware, a
key concern for most American multinational corporations is the
readiness of our international business partners, including
customers, vendors and utility providers, and governmental
entities.
We interact with over 70,000 business partners around the
world, 6,000 of which are considered highly critical to the
success of our businesses. I, therefore, would like to
highlight three initiatives that we have taken to ensure the
continuity of our supply chain and the day-to-day operations of
our international affiliates.
Specifically, our business partner programs, our
contingency planning efforts, and our transition management
programs. As we contacted our business partners to assess their
readiness, we quickly realized that the first priority was
education and assistance. In parts of the world many of our
partners had not even heard of the Y2K problem until we briefed
them. We, therefore, initiated an extensive series of awareness
programs for our business partners as well as the communities
in which we operate.
The awareness program in our tobacco business in Central
and Eastern Europe typifies our efforts around the world. We
organized, sponsored or participated in education programs
throughout this region including activities in Kazakhstan,
Poland, Russia, Turkey, the Ukraine, and the Czech Republic,
among others. We worked with the U.S. Department of Commerce,
the American Chamber of Commerce, local trade organizations and
other groups to sponsor and support Y2K conferences and
seminars.
We also produced awareness materials in nearly every
language in the region, and we worked directly with our most
important business partners to help ensure they understood the
Y2K issue and how to resolve it.
Going forward, we will continue to work with and monitor
our business partners throughout the world.
In spite of our wide-ranging education and assistance
initiatives, we still consider over 600 critical international
business partners to be at high risk or likely to suffer Y2K-
related failures. We, therefore, developed comprehensive
contingency plans, both preemptive and reactive, to address
possible disruptions.
The three key concepts behind our contingency planning
program are straightforward. To address risks in our upstream
supply chain we are increasing our onsite inventories of raw
materials throughout the world, particularly for those items
that are sourced from higher-risk countries.
To address risks to our manufacturing processes, including
utility failures, we are increasing our inventories of finished
goods and have contracted for backup power generation
equipment.
To address risks in our downstream distribution systems, we
are shipping finished products as close as possible to the
final consumer, including clearing the products through ports
and customs facilities. While the costs of these measures are
substantial, we believe them necessary to protect the
continuity of our businesses.
Finally, due to the sheer volume, complexity and
interdependent nature of our systems, manufacturing processes
and business partners, errors and interruptions could occur
which were neither anticipated nor planned for. While we
believe that dramatic problems would be rare, the cumulative
effect of numerous individual issues could be disruptive.
Therefore, we are implementing transition management
programs in each of our businesses to handle the expected
short-lived increase in problems. Each transition management
team will include help-desk operations, a transitional response
team, and event response teams which will incorporate and
supplement our existing problem resolution organizations and
processes.
In summary, we believe there will be problems and
disruptions due to the Y2K issue, particularly with our
international business partners. However, we believe our
comprehensive business partner, contingency planning and
transition management initiatives will help guide us through
the Year 2000 change-over with as few disruptions as possible.
Thank you for your attention and I will be happy to respond
to any questions you may have.
[The prepared statement of Mr. Click can be found in the
appendix.]
Chairman Bennett [presiding.] Thank you very much.
Mr. Roberts.
STATEMENT OF PATRICK M. ROBERTS, SENIOR VICE PRESIDENT FOR
BUSINESS AND INFORMATION SERVICES, AHOLD USA, INC.
Mr. Roberts. Good morning.
Chairman Bennett, and members of the committee, I am
pleased to speak to you today regarding the issues facing
global corporations with respect to foreign suppliers and
operations related to their Year 2000 preparedness.
Royal Ahold is a rapidly expanding international parent
company of retail supermarkets, health care stores, and hyper-
markets in Europe, Asia, the United States and Latin America.
Ahold USA, a subsidiary of Royal Ahold, is headquartered in
Atlanta, Georgia, and is the fourth-largest grocer in the
United States.
We operate approximately 1,000 stores operating under the
brand names of Stop-and-Shop, Giant, Tops, and BI-LO. Mu
statements today address Ahold's Year 2000 initiatives and our
preparedness as a subsidiary of Royal Ahold.
Ahold is taking the Year 2000 problem seriously and has
aggressively addressed all identified technology and business
issues. Total project spending will be in excess of $50
million. Ahold began its Year 2000 efforts in 1996 and in 1997
and 1998 our focus primarily was on technology. This year our
focus is on business continuity planning and event management
planning.
Up until the event, December 31, 1999, we will continue to
perform software testing both internally and, whenever
possible, with critical external partners. On those items over
which we have direct control, we are confident that our early
start will result in little to no impact in our operations.
Ahold supports an autonomous operating company model, both
foreign and domestic. Our dependence on foreign companies is
focused in our supply chain with re-sellable products. Overall
we have classified the risk of a disruption in our
international supply chain as a low probability of occurring,
but a high potential impact if there was a disruption.
We are addressing this exposure through our Year 2000
supply chain methodology. Less than 5 percent of our sales are
from products we directly source from international companies.
At the same time, however, we estimate that 25 percent of our
sales has some kind of international content. Based on our
research and in-depth discussion with almost 250 of our top
critical suppliers, our findings have led us to rate the
potential for disruptions in our business from international
sources as low.
A great deal of our international product supplies have
significant inventory in the United States that provide us a
buffer, for example, spices, sugar, rice, specialty grocery
items. Our most critical suppliers are large corporations and,
on the whole, are taking Year 2000 seriously and are applying
the resources required to correct the problem within their
companies including in-depth interrogations of their
international suppliers.
Also, they are developing contingency plans to minimize
exposure from failures in foreign operations. As an example,
through ongoing communications with one of our large suppliers
in the produce category, we have determined that it owns its
farms in foreign countries, is complete with its critical
technology correction projects, owns a majority of the
transportation chain, has visited the primary ports to assess
potential risks, has met with U.S. Customs to assess potential
concerns and is using this information to actively create
contingency plans.
Some categories of products require special consideration.
Coffee and tea are purchased through commodity brokers. They
usually have 180-day supply of inventory in the supply chain.
We have labeled this as sufficient. General merchandise has an
acquisition lead time of several months duration. The majority
of this seasonal and holiday merchandise is in our distribution
centers weeks prior to the need.
Perhaps our largest area of vulnerability is with
pharmaceuticals. From our research more than 70 percent of the
drugs sold have some foreign content. For most, there is no
good alternative supplier. Many of these products are necessary
to the continued good health of our customers. This is the area
over which we have the least control and potentially the
highest risk.
Red Cross and FEMA recommends that people prepare for Year
2000 as one would for a severe weather situation. This appears
to be an adequate preparation strategy.
Ahold will not be able to eliminate international exposure
entirely. Based on our analysis of our top critical suppliers
we have a high confidence rating in the Year 2000 preparedness.
We will continue our dialogs with our major suppliers and
refinement of our contingency plans throughout the end of the
year.
Ahold is actively developing contingency plans to address
potential disruptions. We are conducting exercises to test
these plans. One strategy that has been developed relative to
international suppliers is to utilize our parent company, Royal
Ahold, with its global supply chain and local presence in most
major markets to assist in restoring any disruption.
Another major initiative in this area is the creation of
the event management plan. This will address how we will
monitor and react to Year 2000-related disruptions. The plan
encompasses not only our technology operations but day-to-day
operations of our stores, warehouses and administrative
facilities.
Communications are critical to successfully reducing the
potential risk of the Year 2000 disruption. We have five
primary audiences for which we have active Year 2000
communications plans: Our stores, the food retail industry, our
suppliers, the local communities we serve, and our customers.
We have a sizable team that is dedicated to communicating with
our suppliers. The Food Marketing Institute has done an
excellent job assisting us with local community relations and
facilitating cooperation across our industry.
A most encouraging part of our conversations with our major
suppliers has been their openness and candor regarding their
Y2K readiness programs, including the strategies that they are
pursuing in their business contingency plans. We have seen a
significant increase in requests for participation in community
events. As a result, publications are being distributed to our
customers to let them know we will be here on January 1st and
beyond.
In summary, Ahold anticipates minimal disruption caused by
our direct and indirect dependence on foreign suppliers. We
have expended significant effort in developing business
continuity plans to minimize our risks. There has been and will
continue to be open and frequent communications with our
suppliers to address all new issues.
We believe there are real and tangible benefits to Ahold
USA in being a subsidiary of a truly global company with strong
business relationships with multiple major product suppliers in
diverse locations. At the same time, we would say that there is
some risk of Year 2000 disruption within the grocery industry.
We do believe some foreign countries and companies have not
sufficiently the Year 2000 problem and our strategy is to find
alternate product sources to minimize our dependence on
partners.
And, finally, we are aware that Congress is working
diligently to ensure our infrastructure will be ready for the
event. We would ask that Congress look at providing further
assistance in areas that Ahold has identified that may have a
potential impact to the health and safety of all U.S. citizens.
Additionally, we request your support in ensuring the
readiness of our Federal programs administered at the State
level, specifically the electronic benefits transfer program
that affects our citizens who may not be able to plan ahead for
any temporary disruptions.
Thank you.
[The prepared statement of Mr. Roberts can be found in the
appendix.]
Chairman Bennett. Thank you very much.
Mr. Krichbaum.
STATEMENT OF CHARLES KRICHBAUM, DIRECTOR, YEAR 2000 PROJECT
OFFICE, PRAXAIR, INC.
Mr. Krichbaum. Good morning, Chairman Bennett.
My name is Charlie Krichbaum and I am the Director of the
Year 2000 Global Project Office for Praxair.
Praxair is one of the largest industrial gas suppliers
worldwide with 1998 sales of $4.8 billion. Our products,
services and technologies bring productivity and environmental
benefits to a wide range of industries, including aerospace,
food and beverage, electronics, steel, chemicals and others.
Thank you for inviting me to speak on behalf of Praxair this
morning.
The goal of Praxair's Year 2000 project is to prepare our
plants and systems around the world to continue to run safely
and smoothly through the Year 2000 and beyond so that we can
serve our customers, protect our employees, and the communities
in which we operate.
To provide a sense of our global operations, Praxair
operates in 43 countries and over 40 percent of our sales come
from outside of North America. These sales from outside of
North America come primarily from South America, Europe and
Asia. While many global businesses rely on imported goods and
services, this is not a significant issue for Praxair. We
produce our products locally in the countries where we operate.
Therefore, the impact of critical infrastructure failures is an
integral part of our overall planning process for Praxair.
Praxair began working on the Year 2000 issue in 1996, and
formed a global project office in early 1998 to accelerate our
progress. The project office reports directly to Praxair's
Chairman, Bill Lichtenberger and is accountable to coordinate a
matrix of global teams to ensure effective management of
resources.
Under the leadership of the global project office, Praxair
implemented a worldwide Year 2000 readiness program that
focused on Praxair's systems, equipment, facilities and
products.
The program included six key process steps which were
awareness, inventory and assessment, renovation, validation,
implementation and most important, business contingency
planning.
Praxair, like other companies, may be affected by the Year
2000 problem of its suppliers. The nature of our business is
such that the most critical suppliers for Praxair around the
world are those that supply electricity, natural gas and water.
To minimize disruption of these services we have taken a number
of important steps:
Suppliers of critical equipment, systems and services
around the world, including those that supply electricity and
natural gas, have been identified and surveyed for their
readiness. Results of these surveys provide important input
into our readiness planning.
By working with our suppliers, we have been able to jointly
identify and resolve many potential Year 2000 problems.
We continue to refine how we will best communicate with
suppliers over the millennium transition weekend, should any
Year 2000 failures occur.
To date, we have assessed and are in communication with
approximately 900 utilities and 4,300 other suppliers
worldwide.
We also have an active, ongoing communication effort aimed
at responding to customer inquiries and gathering information
that we need for our own planning process. This ongoing
communication with both our suppliers and customers is critical
to the success of our planning process.
It should be noted that in the United States these efforts
have been accelerated and facilitated by the passage of the
Year 2000 Information and Readiness Disclosure Act, which
became law last October. It has allowed for the rapid
dissemination and receipt of important information under an
umbrella of good faith. We, at Praxair, very much appreciate
the efforts that resulted in this important legislation that
has allowed industry to exchange information that is useful for
correction of the Year 2000 problem.
To minimize disruption to our critical operations, internal
systems and the ability to produce and supply product to our
customers, all of our business units have developed contingency
plans and business continuity plans. Our contingency plans
provide detailed operating instructions to local personnel in
the event a failure occurs. These plans are generally site-
specific and include local considerations related to utilities,
telephone services, security and fire alarm systems.
Our business continuity plans focus on mitigating potential
failures across and entire business unit and develop business
strategies to maximize safety, delivery of product to customers
and efficient operations.
In summary, Praxair has essentially completed the
renovation and testing of its business processes, plant
operations and computer systems critical to safety and the
company's business.
We do not expect catastrophic collapse of global
infrastructures or sustained outages. We do, however,
anticipate that we will likely experience temporary
interruptions of electric power or other utility supplies to
one or more of Praxair production facilities due to a Year 2000
failure of a utility supplier.
Throughout the remainder of the year we will continue to
complete, schedule work, test our contingency plans, and
business continuity plans. In addition, we plan to man a
central command center over the transition weekend.
We believe that these activities will provide another level
of readiness preparation should any external or unknown problem
arise for Praxair.
Thank you very much and I will be happy to answer any
questions.
[The prepared statement of Mr. Krichbaum can be found in
the appendix.]
Chairman Bennett. Thank you.
We will now hear from Mr. Haukebo.
STATEMENT OF KEVIN HAUKEBO, Y2K PROGRAM MANAGER, PROCTER &
GAMBLE
Mr. Haukebo. Mr. Chairman, I want to thank you for this
opportunity to share with you Procter & Gamble's preparation
for the Year 2000. We appreciate your leadership that this
committee has shown in identifying problems and solutions.
Specifically you asked that I address the impact of Y2K on our
global supply chain and our ability to maintain operations
abroad. I will highlight my testimony and ask that the
remainder be inserted in the record.
Chairman Bennett. Yes. All of the statements in their
entirety will be part of the record.
Mr. Haukebo. We have been working hard over the last 3
years to minimize the risks of potential Y2K disruptions to our
business. This work has included an internal review that I
would like to touch on briefly and an external review that
covers our global supply chain. Our initial efforts focused on
identifying and correcting critical information and embedded
technologies. We inventoried and prioritized these systems and
technologies based on how critical they are to our business.
For example, our facilities services group has checked over
10,000 systems in nearly 300 locations. Our information
technology organization has completed work on over 7,000
applications and nearly 200,000 pieces of technical
infrastructure and our product supply organization has finished
work on over 100,000 internal components at 150 sites and
analyzed over 10,000 suppliers.
This in-depth knowledge of our internal readiness is
instrumental in formulating our approach with external
partners. We have undergone considerable efforts to contact our
external business partners to ensure that current business
operations are maintained through the millennium transition.
These external partners include suppliers, customers and
service providers. We initiated this process to build our
confidence in their ability to ensure the ongoing health of
their business.
Our objective is to manage risks related to Y2K with our
external partners while maintaining the integrity of our supply
chain so that our consumers have access to our products.
Clearly there is no simple or automatic formula for
determining business criticality and risk of partners. We have
developed a criticality risk grid which is being displayed to
help us categorize our partners and determine the appropriate
follow-up steps. For example, we conduct face-to-face meetings
with critical suppliers worldwide.
Based on our work to date, we are not expecting any major
disruptions to our supply chain. We either have confidence in
our partners or have developed work-around plans that are ready
to execute with more than 99 percent of our external partners.
We realize that there will be outages beyond our control.
The impact will vary from country-to-country. We have developed
business continuity plans which assume something will go wrong.
But the objective here is to protect our critical business
processes from disruption or failure before, during and after
the Year 2000. These processes are supply chain, cash-flow,
communications, and site utilities. Specifically you asked for
our perspective as a multinational company on the status of the
infrastructure for critical utilities abroad.
Our initial assessments started with the Gartner Group
information on utility risks. Much of that was shared with this
committee. Local Procter & Gamble country contacts then follow-
up with the utility providers in each of their local locations.
We solicit information using an in-depth questionnaire,
personal phone calls, face-to-face interviews, where possible,
to confirm this information.
We are posting figure 2 which gives us our assessment which
confirms the Gartner data about where we are with
infrastructure status by country.
We have also completed utility risk assessments at each of
our manufacturing, office and data center sites worldwide. This
includes completing internal remediation efforts and staffing
plans for critical periods. In addition, we have developed
contingency plans to deal with potential electric, gas, water
and sewer outages.
We have also examined the impact of Y2K on
telecommunications. We have assessed the risk of voice and data
disruption where we do business due to the Y2K transition. In
general, we consider parts of Eastern Europe, Asia, Latin
America and the Middle East to be of medium-to-high risk.
We have tested various telecommunication options, such as
satellite phones for high-risk sites, and other satellite
alternative for data transmission. In addition, we have been
working with the International Y2K Alliance of Multinational
Companies to deal with regulatory issues impacting
telecommunications. The U.S. Department of State has been very
supportive and we appreciate the State Department's help.
In summary, we are working hard to ensure that the brands
our consumers know and trust are going to be there when they
need them. While we do not expect any major disruptions to our
business, we are preparing contingency plans to address outages
beyond our control.
We believe that preparedness of Procter & Gamble and our
people will help us meet the challenge of Y2K.
I want to thank you again for this opportunity and I will
be happy to answer any of your questions.
[The prepared statement of Mr. Haukebo can be found in the
appendix.]
Chairman Bennett. Thank you.
We are grateful to every member of the panel and one of the
reasons we put you on at the last and as a single panel is that
you got to hear everything that came before and, so, we can ask
you, do you have any comment, contradiction, confirmation,
whatever, on anything that has been said either by the State
Department, by the second panel or amongst yourselves.
Does anyone have a burning desire to speak up and say, wait
a minute, I really disagree with that or you should pay real
attention to that because that one was right on. You get to be
the cleanup hitters that can comment on what you have heard.
That is the only reward for going last. Sorry to have made
you sit through the whole morning.
Mr. Surdu. Senator?
Chairman Bennett. Yes?
Mr. Surdu. Senator Bennett, I might just say that all the
analysis that we have seen and we have heard and we continue to
follow very closely relative to the international preparedness
continues to be very consistent. I mean we have validated to
the best of our ability within countries, as I said, that we do
business in. In some cases, however, and I think it should be
my opinion understood that individual plans relative to the
identified readiness by country, obviously, will differ from
company to company based on their business implications.
As an example, the only area that we are looking at
slightly differently, and I would share this with the
committee, is China in this case. I know China has been
generally moved up in terms of their preparedness.
One area that we are looking into right now is in the area
of customs. China is one of the few countries where the customs
process is slightly different in that the paperwork and the
equipment go together. And there are some differences when you
think about that if, in fact, they have some problems from a
customs office standpoint, how do you get the shipment out of
China?
So, as we are looking through our contingency plans as we
get closer to the new millennium, obviously, we are watching
very closely. Our plans will get modified from time-to-time but
certainly the China customs office area is one that we are
looking at very closely right now.
Chairman Bennett. On this committee we have looked at U.S.
Customs as well.
Mr. Surdu. Right.
Chairman Bennett. Because it would be great if we get
everything coming in and then suddenly it stopped at our
borders because our computers do not work.
Mr. Click?
Mr. Click. I would agree. Essentially I have not seen too
many contradictions in what has been presented today and what
our understanding is on a global basis. I would like to comment
on one of the comments on the gentleman from CIO Magazine, who
was discussing when programs will be completed. And, in fact, I
think that my colleague from Ford mentioned it as well.
Our plan will run well into the Year 2000, not the
remediation part of the program but essentially monitoring our
business partners up through and into, well into the next year.
So, we will not disband our team until the March timeframe.
Chairman Bennett. Hmm-hmm.
Any other? Yes, Mr. Krichbaum.
Mr. Krichbaum. Yes. I would like to comment.
I think that one of the things that we have found and
everyone has talked a little about is continuity planning and
contingency planning. By working very closely with our
customers and our suppliers, we can understand both what our
customers' contingency plans are and what our suppliers'
contingency plans are.
It helps to understand what each company is doing in the
whole supply chain and by sharing that information, we can make
a stronger linkage. I would pass that along as a learning for
all of us.
Thank you.
Chairman Bennett. You are here as the examples of those who
are doing it right. And every assessment that we have made out
of this committee, particularly the consultants, we have sent
abroad who have worked with the State Department, they come
back and say the big organizations are probably in pretty good
shape. And your testimony would underscore that. There is a new
acronym in town called the SME's, or the small-and-medium-sized
enterprises. And inevitably that is the area where we get some
difficulty.
Now, you have done your analysis of your suppliers. Some of
you have indicated that your suppliers are not SME's. They are
all big companies. But do you have a sense from your inventory
of where the SME's will be in some of these countries,
particularly--and this is an unfair question, but we live with
unfair questions around here all the time--those SME's that are
not being prodded by having a very large partner, like Ford or
Philip Morris or Procter & Gamble, to look down their throat
and say, if you do not get in shape we are going to go some
place else. You have very big hammers with which you can
enforce your questions.
Do you have any sense of foreign SME's in the context that
I have described here? Any of you?
Mr. Surdu. I will say that per se we do not. If you take a
look at the size of our supply base--and I agree with you, we
do have an opportunity to share our practices and get them
engaged maybe easier than others--but regardless of size, I
think, you know, we have been focusing attention on the total
supply base, irrespective of their size, and they have all been
making very, very good progress.
We are concerned about, you know, your definition of the
SMEs, and those, I personally worry about those that are now,
with 6 months to go less than 6 months to go, are beginning to
talk about Year 2000 readiness or preparedness actions.
Chairman Bennett. Yes.
Mr. Surdu. To that extent, what we have attempted to do for
some time now is to share where we are with our consumers,
whether it is via letters through our dealer body, whether it
is our web page to share information on where we are at and
what is going on, in hopes that that will help them get engaged
as quickly as they need to get engaged to be there.
So, I do not per se have any sense, although I do worry
when I hear about small-and-medium-sized businesses, I worry
for them, because at the end of the day it will not only impact
them, it will impact the economy and all of us at large.
Chairman Bennett. Mr. Click?
Mr. Click. We have some experience in that. In our view of
our business partners in lesser developed countries such as
parts of Central and South America and parts of South East
Asia, the level of computer proliferation has not passed down
to the smaller-to-medium-sized companies as much as in the more
developed Western Europe and North American areas.
So, we would be more concerned in the more developed
countries such as Japan or Korea, more developed Asian
countries and more developed countries in Europe or even Russia
where the medium-sized companies may not have gotten the
message yet.
Chairman Bennett. Yes?
Mr. Haukebo. The other comment I would add is that I think
as we are going out and I have heard this from several, you
know, we evaluate how our supply chain is going. And when we
talk to them we want to talk to them about how are they
evaluating their suppliers? And I think we are getting a ripple
effect here where we may be some of the first ones who are out
there talking to people about this and starting to spread the
news and warn people about this. We are now seeing the
subsequent people going out and also doing that to affect their
supply chains.
Chairman Bennett. Have you done anything, any of you, or
are you aware of any effort generally to inform your own
employees as to where they stand?
Mr. Surdu. The answer is, yes. I mean we have shared the
entire program, our status and issues around the Year 2000 with
our employee base. And obviously as we get closer to the
millennium we will continue to provide them updates in terms of
what we know of relative to the general economy international.
In fact, one of the things that, obviously, we are looking at,
we understand, obviously, that the government will be providing
an update shortly in terms of, by country, in terms of
transportation recommendations and so forth around the
millennium. That is going to be important to us and that is
information we will share to our employees as we move forward.
Mr. Click. We have done quite a bit on this and we have a
couple of perspectives on it. First, we recognize that our
employees might be concerned about the growing millennium hype
and how that might impact them personally.
For example, if an employee is concerned about their home
and what is going on with their family, they are going to be
less concerned about issues at Philip Morris.
Chairman Bennett. Sure.
Mr. Click. So, we have initiated a series of internal
awareness programs through pamphlets, newsletters, articles in
the company paper, websites, and management presentations to
give them the type of information they might find useful in
helping prepare themselves personally for the change over in
the millennium.
Second, as we change over, our employees are really our
first line of defense against any issues that might come up
whether it is a specific machine that might be malfunctioning
or the relationship with a business partner or a particular
internal system they are using. So, we are trying to prepare
them to be our eyes and ears as we go forward to understand
what is happening, who to contact, and how to get the
appropriate corrective actions underway.
Chairman Bennett. Mr. Roberts?
Mr. Roberts. We also have a program for awareness within
our associates. We have been doing that for the past 3 years.
We prepared a bulletin also for our customers similar to this
for our associates, to understand where they should be
planning, how they should be planning for the event. The other
thing within our company, we have about 1,300 associates poised
for the months of December and January to be on-board, be on-
call, without leave, to be prepared to handle the disruptions
if they may come to our customers.
Chairman Bennett. I think we are going to see more people
working this holiday weekend than any other in recent history.
There have been press stories over the weekend about so-
called trap doors left behind by programmers for the purpose of
accessing their programs and they will say this is done for
maintenance, future modifications, but there is the fear that
these might be used in an unethical way either to siphon off
money or to produce mischief later on.
Are any of you aware of any efforts to try to monitor that?
I can understand a perfectly legitimate reason for a trap door.
But I can also understand the risk that is there. When you are
dealing with Y2K everybody wants to turn a risk into a
conspiracy theory and tell us that the world is coming to an
end. So, do any of you have any comments about that particular
news story?
Mr. Surdu. Senator Bennett, I would just tell you what we
have done at Ford and it is probably fairly consistent in many
other parts, many other companies. When we remediate code there
is a before and an after. And there is a very straightforward
software electronic technique for reporting that which has
changed. And part of our whole remediation process is to review
all the changes before they go into production and to sign-off
on all of those changes.
So, having someone put something in the code means that
somewhere you have broken down in the process. But what we have
done in our process is we validate all the changes before they
go into production.
Senator Smith. Mr. Click?
Mr. Click. Similar to Philip Morris, we are concerned about
this possibility. It is not just a Y2K possibility. We have
used external contractors to assist us in our systems
development efforts for many years. So, to address this
problem, first, we restrict external contractors to specific
areas of our test and development computers. Their user IDs and
passwords are set to expire when their contracts expire. And
similar to Ford, before any programs that they developed are
moved back into our production computers, they undergo a
rigorous quality assurance test by Philip Morris employees.
So, no system is completely fool-proof but we believe we
have put prudent controls in place to address the issue.
Mr. Roberts. I would like to elaborate just a moment on
what the gentleman from CIO Magazine said. This is an
opportunity we have within this Year 2000 remediation effort to
really clean house. We have had the opportunity to examine
every line of code, every system process in this whole
remediation effort and we feel, I think, more confident today
than we ever have that we understand what our base is, its
secure and it is ready for the transition.
Chairman Bennett. One final question.
The thought has occurred to me as I have gone through this
whole Y2K experience that if the society could be as disrupted
as it possibly could be as a result of what is basically an
accidental failure of the computer, nobody planned this. There,
again, are some conspiracy theorists who would disagree with
that. But nobody planned this.
How vulnerable are we to deliberate attacks at some point
in the future? I have spent some time with the Defense
Department and they tell me these attacks are literally going
on every day. People are attempting to break into the Defense
Department computers either hackers who are doing it just to
prove that they can; or stalkers or crackers, depending on
which term you want to use, who are doing it for malevolent
purposes either for terrorist purposes or some other
motivation.
How secure--I think the Defense Department can handle
itself. I think the Defense Department can defend itself. But
if I were someone who wished the American economy ill, after I
had tried to get into the Defense Department a few times and
failed, I would decide, well, if I cannot take down Hill Air
Force Base, I will take down Dearborn. I will cause widespread
destruction and disruption by going after corporate systems.
What have you done in this process, back to your comment,
Mr. Roberts--and referring to the CIO Magazine comment about we
are upgrading and we feel strongly--what have you done on
security and preparing yourself against a stalker that would
come at you and, say, for purely malevolent purposes, I want to
get into your system and one place or another shut you down and
cause serious disruptions?
Mr. Roberts. I think that the vulnerability is getting more
and more with the literacy of the general public becoming more
and more computer literate. That challenges corporations such
as ours to take extraordinary measures on security. We build,
in the common buzz words of firewalls and security, barriers to
have access into our systems and our computers. I do not
believe that any of us have the security that the Defense
Department has but I believe that it is a high priority in most
of our large corporations.
To the extent that we can detect, certainly detect, to
prevent may be an additional challenge, but in detecting it
allows you to do measures to prevent.
Chairman Bennett. OK.
Mr. Krichbaum?
Mr. Krichbaum. Mr. Chairman, I think that all of us are
trying to increase the security efforts that we have out there
and increase the firewalls. One of the things that we plan to
do specifically during the transition weekend, or roll-over, is
to isolate our systems to make sure that, during that period of
time when there are many press articles about the potential of
hackers and other people, we do not in any way get
contamination in the system. However, we are periodically
posting year 2000 readiness disclosure information to our web
site (www.praxair.com) and we plan to continue updating the
site through the millennium date change.
Of course, that is only one period of time and eventually
you have to put systems back online. But it does allow you to
make sure that during that window you have secured the systems.
So, we pursue that at this point.
Chairman Bennett. Thank you very much.
I appreciate your testimony and it has been very helpful.
[The prepared statement of General Motors can be found in
the appendix.]
Chairman Bennett. The committee stands adjourned.
[Whereupon, at 12:34 p.m., the committee was adjourned.]
A P P E N D I X
------
ALPHABETICAL LISTING AND MATERIAL SUBMITTED
______
Prepared Statement of Ron Balls
*DISCLAIMER*
The material in this document is provided for information purposes
only. The views expressed are not necessarily those of the ITU nor any
of its members.
Neither the ITU, nor any of its members, assumes any responsibility
for the accuracy or completeness of this information and shall not be
liable for any damages arising from its use.
1. Introduction
The International Telecommunications Union (ITU) Year 2000 Task
Force welcomes the opportunity to address the United States Senate
Special Committee on the Year 2000 Technology Problem, and to detail
the measures that the ITU has taken to prepare the telecommunications
industry for the Year 2000 transition.
Members of the Task Force, which are drawn from many of the largest
telecommunications operators and suppliers, are confident that no major
disruption to telecommunications will occur as a result of the Year
2000 issue. The international carriers are well advanced with their Y2K
programs. Many have completed their equipment upgrades and are now in
the business continuity planning stage. Where difficulties remain, they
are largely confined to the less developed economies, and the ITU has
been working hard in these regions to advise and assist these operators
to achieve as much as possible in the time remaining.
2. Background
Following representation from a number of major telecommunications
operators, the ITU-T Study Group 2 established a Year 2000 Task Force
in March 1998. The Task Force had the objective of raising awareness of
Year 2000 and associated issues with telecommunication operators,
providing practical advice and support, and ensuring cross-
fertilization of Year 2000 best practices amongst the operators.
The World Telecommunication Development Conference (Valletta,
1998), placed the matter on the agenda of the ITU - Telecommunication
Development Bureau (BDT) as an issue to be addressed on an urgent
basis.
Subsequently the Plenipotentiary Conference of the International
Telecommunication Union held in Minneapolis in late 1998 (PP-98),
adopted a Resolution COM 105, proposed by the USA, entitled ``Urgent
need for prompt action to address the Year 2000 problem''. Through this
resolution, the Plenipotentiary Conference resolved to give every
possible encouragement and support to the efforts of operators and
carriers around the world to address the problem and called upon
operators to take the necessary steps to prevent system failures.
3. ITU Approach to Outreach
The ITU Year 2000 activities have been carried out in close and
active collaboration between different branches of the ITU. This has
ensured a balance between the needs and interests of the developed and
developing countries in terms of Y2K preparedness.
In addition, the Task Force has operated in a spirit of co-
operation and with a recognition of the mutual benefit to be gained by
the pooling of resources and expertise in the face of this challenge.
It is therefore not a surprise, to those who know the background and
history of the ITU, that the Year 2000 Task Force has achieved high
levels of co-operation, both across countries and between competing
operators in the same country, to a level probably unprecedented
outside the telecommunications industry.
The Task Force was formed within the existing structure of the ITU-
T Study Group 2, which exists to provide a forum for standards
definition and exchange of information to facilitate transfer of
telephone calls between the various operators and administrators. It
has sought to involve as many industry representatives as possible in
the work of the Group, both from telecommunications operators and from
hardware and software suppliers. It has relied also on members' hard
work and dedication to the goal of beating the Y2K bug, while ensuring
others are as well prepared as possible.
3.1 Task Force Terms of Reference
The Terms of Reference of the Year 2000 Task Force are to:
raise Year 2000 awareness among all telecommunication
administrators and operators
provide practical advice, support and information
establish the compliance position of all carriers and
operators and influence compliance where possible
promote sharing of information within the
telecommunication community and with other customers
promote cross-fertilization of Year 2000 best practices
among the membership
provide support and encouragement to developing countries
on Year 2000 compliance readiness.
The Year 2000 Task Force has approached its task through a
combination of measures. Regular meetings and audio-conferences have
been held between members of the Task Force and of its various sub-
groups.
See Attachment A.
These groups cover the following areas:
inter-carrier testing
business continuity planning
information management
early warning
developing countries.
See Attachment B
3.2 Compliance Questionnaire
The Year 2000 Task Force prepared a Y2K compliance questionnaire,
which was issued in April 1998 to all ITU members. To date, the Task
Force has received over 530 responses from 150 countries, representing
more than 300 Operators/Carriers.
Further details are at Attachment E including a copy of the summary
in the public domain on the web site.
The responses have assisted the Task Force in identifying problem
areas to target for action.
The summary results of the questionnaire are available on the
public section of the ITU website, while the full questionnaire results
are available through the site's closed user group. The Closed User
Group access is only available to Telecoms Operators/Carriers and then
only to those who have completed and returned a questionnaire.
An electronic update facility has been provided to enable operators
to update their information.
This is the only source of data, that we are aware of, which
provides a summary of the overall Year 2000 position of Telecom
Operators which is in the public domain (available to all who have
access to the world wide web). As such this is referenced extensively
by Operators, many customer groups and Year 2000 sector bodies.
3.3 Regional Sub-Groups
Regional sub-groups have also been established to concentrate on
specific areas of the world:
Arab countries
African countries (French speaking)
African countries (English speaking)
North America
Latin America
Asia Pacific.
All of the sub- and regional groups have held meetings and are
pursuing their own activities, some via electronic communication. The
results of their work are regularly posted on the ITU Y2K website
(www.itu.int/y2k), after review and approval by the Information
Management subgroup. The ITU Year 2000 website has links to websites of
other organizations and companies, including operators, financial
institutions, vendors and regional bodies, providing Year 200 related
information, including compliance programs, test results and best
practice advice, etc.
In addition, the activities of the Year 2000 Task Force have been
publicized and promoted through the web pages and through regular
articles in the ITU's magazine, the ITU News, which is distributed to
all ITU members world-wide.
3.4 Year 2000 Guide for Telecommunication Operators
Through active collaboration between experts, a comprehensive Year
2000 Guide has been prepared. The Guide provides telecommunication
operators with a high-level overview of the process of dealing with the
Year 2000 phenomenon. The Guide has been widely distributed, under the
signature of the ITU Secretary-General, to all ITU Member States,
sector members, National Y2K Co-ordinators as well as to other
international and regional bodies and standards organizations.
The Guide is available on the ITU's website in four languages
(English, French, Spanish and Russian).
The Guide supplements other activities of the Year 2000 Task Force
and the technical assistance activities undertaken. It provides all
telecoms administration, particularly those in developing countries,
with timely practical advice on how to prepare their telecommunication
infrastructure for the millennium change.
3.5 Partnership and Collaboration
The ITU's Year 2000 work covers all segments of the
telecommunication industry, representing both operators and suppliers.
Experts gave generously of their time and expertise by participating in
the workshops and subsequently providing advice.
Significant and highly valued in-kind contributions have been
received from the Government of Australia, British Telecommunications,
Bell South International, Cable & Wireless, Deutsche Telekom, INMARSAT,
INTELSAT, South Africa Telkom and Telia. The Administrations of South
Africa, Morocco, Egypt, Australia, Brazil, and Russian Federation,
Poland and Jordan have provided support and facilities for the
organization of workshops.
The project benefits from extensive collaboration with
international organizations such as the World Bank, UNDP and regional
telecommunication organizations such as ASETA and APT and RCC.
Financial contributions have been received from a number of
Operators, Vendors and other Organizations. These contributions are
placed in a separate project account and the contributory sponsors are
provided with periodic progress reports.
The Task Force has maintained close contact and co-operation with
other organizations dealing with the Y2K compliance problem. These
include the infoDev program of the World Bank, the OECD and the
European Union. Where appropriate, website links have been established
between these organizations and the ITU website and vice versa.
3.6 International Year 2000 Co-operation
The Task Force has fully supported the United Nations initiative
relating to the National Coordinators and to this end has
a) given presentations at both United Nations meetings
11 December 1998
and
21-23 June 1999)
b) hosted a meeting (in Geneva in 3rd to 4th May 1999) of
International Sector Coordinators from:
International Civil Aviation
Organization (ICAO)
International Air Transport Agency
(IATA)
International Maritime Organization
(IMO)
International Energy Agency (IEA)
Unipede/Eurelectric
Global 2000 (Private Financial
Institutions) Joint Year 2000 Council
(Public Financial Institutions,
Regulators, Security Commissions etc.)
World Bank
3.6 Other Groups
Joint Year 2000 Council
The Chairman of the Task Force sits on the External
Consultative Committee to the Joint Year 2000 Council to
provide input on Telecommunication Year 2000 status to this
Public Sector Finance Group.
Global 2000
Similarly a close relationship is maintained with the Global
2000 group to provide a linkage with the private financial
sector.
EUVA/INTUG
Regular presentations are given to Telecommunications User
Groups and sector bodies including the European Virtual Private
Network Users Group (EUVA), International Telecommunications
User Group (INTUG) and the Securities and Investment
Association (SIA) etc.
3.7 Expert Support
Requests for expert inputs in launching and managing Year 2000
programs have been received from several administrations and many of
these have been met.
It is likely that more requests will be received in the near
future.
A delegation of the experts from the Year 2000 Task Force will be
visiting two major areas of the world for consultation and discussions
with operators and administrators on aspects of testing and business
continuity planning. The visits are planned for August-September 1999.
4. Impact of Year 2000 on International Telecommunications
It is unlikely that there will be material disruption to the
telecommunications network in terms of call connectivity. There is very
little date information passed across the interfaces in real time.
Major Operators have undertaken extensive tests, many using the five
layer model with the final layer being Inter-Carrier (International
Testing)
A primary focus of the work of the ITU Year 2000 Task Force has
been on inter-carrier testing. A considerable number of operators have
been involved in this activity, carrying out a comprehensive range of
tests.
The broad strategy is to ensure that tests are carried out
involving each type of International Gateway Switch and with as much
global reach as is possible in the time and that logistics will permit.
To date tests have successfully been completed involving the
following Gateways:
Futher detail is at Attachment C.
There may still, however, be difficulties in connecting a call to
some Operators, and there may be some consequential effects due to
traffic being diverted via other routes. However, the Task Force
remains of the view that major players and their major trading partners
are not likely to see significant disruption to service as a direct
result of Y2K.
An impact which does require some attention is the possibility of
congestion at the time of the Century Date Change with an increased
level of calls and customers checking for dial tone.
5. Status of Preparedness (by region)
5.1 Raising awareness
A primary goal to ensure the achievement of the following
components throughout the various regions of the world:
Raise awareness of potential problems and potential
solutions among developing countries and disseminate information
required for establishing and managing Year 2000 programs at national
and sectoral levels;
Provide platforms for the exchange of information amongst
operators in the developing countries with operators with established
Year 2000 programs and suppliers;
Provide expert support to countries requesting assistance
in launching and managing their Year 2000 programs;
Conduct assessments/studies highlighting the needs of
developing countries; and
Collaborate with other organizations, viz., infoDev
Program of the World Bank, the United Nations Development Program, and
Regional Telecommunication Organizations (viz., APT, ASETA, RCC etc.).
5.2 Information Dissemination
Absence of awareness is an obstacle that must be overcome in order
to enable operators and governments to initiate action to address the
problems associated with the year 2000 risks. To tackle lack of
awareness at government level the ITU has pursued the ``awareness
raising'' component by sending communications to Member States and
sector members and organizing a series of workshops in different
regions.
By raising awareness and providing a forum for the exchange of
information, the goal is to prevent at least major system failures
related to the Year 2000 problem. In July 1998 a communication was sent
to all administrations and sector members relating to the Year 2000
problem including the tool kit developed by the Task Force together
with the ITU Year 2000 self-assessment questionnaire.
5.3 Regional Workshops
Workshops have been organized in different parts of the world with
the support of industry and other organizations with an interest in
assistance to developing countries, notably the World Bank infoDev
program.
The objectives of the workshops are to:
generate awareness about the implications of the Y2K
problem
initiate and strengthen information sharing between
operators with established programs and developing countries
promote and strengthen effective supplier relations; and
provide information, standards, tools and techniques in
evolving strategies and developing action plans to manage successful
compliance programs, including contingency plans.
In addition, a number of workshops focusing on specific issues,
such as contingency planning and business continuity have taken place.
The participants in the workshops have come from administrations
and operating agencies, major vendors and international and regional
satellite organizations and the World Bank. The workshops addressed a
range of issues which are essential to a successful Year 2000
compliance program such as testing, quality assurance, management of
supplier relations and contingency planning. The supplier panels
featured presentations on the status of compliance of products, the
capacity to meet the needs of operators and their own contingency
plans.
Workshops dates, locations and number of attendees are in
Attachment D.
The workshops enabled the identification of countries that need
further assistance as well as the future information needs of
developing countries. The participants in the workshops decided to
constitute themselves as Regional Working Parties on the ITU Year 2000
Task Force in order to maintain a flow of information. While enlarging
the scope of participation in the Task Force, this structure
facilitates a continuous sharing of experience and creates a continuing
forum in which to discuss mutual issues and problems and develop common
solutions.
Operator views on their expected completion dates for Year 2000
readiness, as advised at the recent workshops are at Attachment xx (In
a number of instances this is an update on the questionnaire responses)
5.5 ITU/World Bank Report on situation in Sub-Saharan Africa
As part of the activities highlighting the needs and specific
situation of developing countries, the ITU and the World Bank's
Information for Development (infoDev) Program commissioned a study
covering 46 African countries of sub-Saharan Africa entitled ``Impact
of the millennium bug on telecommunications in sub-Saharan Africa''.
The study estimated the monetary and other resource requirements to
upgrade or replace network elements, operating systems, management
systems, telex and mobile networks, in order to achieve Y2K compliance.
The objective of the study was to answer the question as to the
resource requirements of the Year 2000 compliance program in
telecommunication with a view to raising funds on an emergency basis
for the Year 2000 remediation in the telecommunications sector in sub-
Saharan Africa. This study is being considered by the World Bank and
other agencies with a view to raising the resources required for
maintaining the most critical elements of the telecommunication
infrastructure in the region.
5.6 Asia Pacific
The Asia Pacific region has been particularly active in addressing
the Y2K problem, with regional initiatives led by Telstra Corporation
of Australia. A fortnightly mailing list was established to advise the
responsible managers throughout the operators and suppliers in the
region of IT Y2K taskforce activities. All Task Force documents were
distributed to more than 25 carriers in the region.
In addition, Telstra has taken a lead role in inter-carrier testing
in the region, both domestically and internationally. Since the
regional workshop held in March 1999 in Queensland, Australia, there
has been a surge of interest and participation in the tests. The key
issue has been the availability of captive environments, with live
switches proposed to be used in some cases. Suppliers have also been
keen to participate in these. Within Australia, Telstra Corporation is
working co-operatively with competitors through the Australian
Communications Industry Forum (ACIF) to manage business and community
expectations via a focus on inter-carrier service continuity, including
cross-network testing and contingency planning.
There has also been considerable activity on testing carried out in
Japan, Korea, Philippines and Singapore amongst others.
5.7 Arab States
The ITU Arab Region Y2K Task Force was set up in December 1998 and
its most recent meeting was held in Amman, Jordan, in the period 20-22
April 1999. The meeting was organized jointly by the ITU Regional
Office in Cairo and the Jordan Telecommunications Company.
Delegates representing 13 Arab States participated in this meeting,
namely: Algeria, Egypt, Jordan, Libya, Mauritania, Morocco, Oman,
Palestine, Saudi Arabia, Sudan, Syria, United Arab Emirates, and Yemen.
Representatives from the ITU Task Force, international carriers,
operators, and suppliers were present including Arabsat, British
Telecom, BCTEL (Canada), World Space, Iridium, Alcatel, and Siemens.
Each delegation from the operators in the Arab region who were
present, as well as the carriers, presented very briefly the status of
their Year 2000 programs. The picture that emerges from the region is
optimistic. Most operators are on course for completing the compliance
programs, now turning to deploy contingency plans, and a few major ones
are likely to participate in inter-carrier testing with other operators
in the region and further afield. A few least developed countries are
still in need of expert advice and input.
5.8 South and Central America
The workshop in Foz-do-Iguacu hosted by Brazil in March 1999 did
much to clarify the position in the Region. There is a high level of
activity, with active participation in inter-carrier testing and some
innovative approaches to testing. However, there are still some gaps in
information pertaining to some countries. The active involvement of
CITEL in the Task Force, it is hoped, will contribute to both increased
participation and information sharing in the region.
5.9 Central and Eastern Europe
The workshop in Moscow for the CIS Region and the Baltic States,
and the one in Warsaw for Central Eastern Europe, represented the first
major contact between the operators and administrations in the region
and the Task Force. Most operators in the region suggest that their
compliance programs would be completed towards the end of the year.
At the workshops there has been valuable discussion between the
Testing experts on the Task Force and the operators and there were
several expressions of interest in participating in inter-carrier
testing. However, some concerns still remain and relate in particular
to equipment which is no longer supported by manufacturers because they
have ceased to trade. The Task Force plans to further build on the
contacts established with a workshop on contingency planning, and
possibly by visiting a few countries in the region.
5.10 North America
The North American Telcos have provided extensive support to the
work of the Task Force with leadership being provided by GTE. Other
involved groups are the major Long Distance Carriers, the US Telco
Forum (and some of its individual members), the Canadian Telco Forum
(and individual members) and others.
5.11 Western Europe
Western European Operators have carried out inter-carrier testing
involving a number of Companies and have provided extensive support to
the Task Force.
6. Contingency Planning/Business Continuity
Following the awareness phase, a major element of the work
programme has related to Business Continuity Planning. The subgroup
working on this has prepared material covering the following subjects
and these have been loaded onto the website:
Strategy
Business Processes
Impact Analysis
Templates
Generic Business Processes for Telecommunications
Operators
Glossary
Slide Packs (for within company presentations)
Worked examples will be placed on the web site shortly and a
publication similar the Guide (referred to earlier) is being prepared.
Activity training programmes are planned in different parts of the
world and the initial session was held in Amman, Jordan on 20-22 April
1999. A second workshop was planned for the CIS Region (Irkutsk, 13-15
July 1999) at the invitation of the Russian Administration however this
has been postponed to later this year to ensure relevant attendance.
Training programs are also planned for the Africa Region in
collaboration with the UNDP and the Asia-Pacific Region.
The main objectives of the programme are to:
Provide operators with the background and
methodology on how to develop contingency and business
continuity plans, and demonstrate these through practical
workshops designed specifically for this purpose; and
Provide a forum for discussion between the
operators and major suppliers and facilitate information
exchange on the compliance status of products and systems and
contingency plans.
Where appropriate the training programme will also cover testing
with the objective to:
Share information and exchange experiences about
conducting tests at component, cluster and service levels; and
inter-carrier testing within a region and other regions
Existing processes, using the Universal Restoration Manual,
augmented as needed, will be used for handling any international
congestion or terminal difficulties.
Early Warning
The Asia Pacific region is key to the ``Early Warning'' system
being established, using a ``Follow the Sun'' approach to the
transition period. Between New Zealand and Thailand there is a 6 to 8
hour window of time, within which 90% of all switch types and 90% of
all transmission equipment will be in operation. This region therefore
represents a microcosm of global telecommunications within a 6 hour
window, and will provide the rest of the world with valuable data on
any difficulties that may emerge.
The Early Warning sub group has plans in place to monitor the
position through each of the 24 time zones adopting a positive
reporting approach (30 minutes after midnight and at noon on the first
working day) with information being held on a database at the National
Co-Ordination Center in the USA. Participating Operators will input to
this and have access to the information.
7. Outstanding Issues
The workshops have been successful in the objective exchange of
information on the programs of various countries. The presence of
suppliers provided a good opportunity for both parties to discuss
problems associated with their equipment and systems. The workshops
have established that awareness of the problem is rising. Several
countries have national planning mechanisms in place. Even in the
absence of national programs, telecommunication operators have begun
addressing the issue, though it is a matter of concern that lack of
national planning may aggravate interdependency problems. In many
developing countries progress is typically constrained by factors such
as:
Lack of commitment at highest levels of the
organization;
Sound project management;
Shortage of skills at various levels;
Lack of facilities such as testing environment;
Lack of funds; and
Low supplier response.
In view of the likely demand for assistance over the next few
months, ITU has requested operators with established programs to
provide expert resources for short periods to be deployed in developing
countries.
While it is difficult to accurately estimate likely requirements
that may arise in the future it is inevitable that this will be a
growing demand and some of this will be for assistance next year to
resolve any difficulties emerging. The growing list of countries
requiring assistance and the limited resources of expertise available
may become a bottleneck. The ITU is seeking more support from those
countries and operators that are more advanced and have well-
established programs in place.
__________
Responses of Ron Balls to Questions Submitted by
Chairman Bennett
Question 1. In your testimony, you alluded to but did not discuss
infrastructure problems (power, transportation, etc.) in developing
countries. To what extent will ITU members have back-up capabilities in
the event that host nation infrastructures fail?
Answer. Most Telecommunication Operators have power supply back
ups. In the event of power failure batteries take over for the
extremely short period that it takes for the oil fueled generators to
kick in. The quantity of oil supplied will depend on the site and
assessment of risk etc., and could be in the range of a few days to 30
or so. Some sites in lesser developed countries, more used to power
outages, will have more than one generator at key locations.
Question 2. Determining the Y2K readiness of technical equipment
produced by manufacturers that are no longer in business is a problem
the Committee has discussed in other venues. Can you estimate how much
of this non-supportable equipment is currently operating and the
possible impact on the telecommunications network?
Answer. Very little with the International Gateway switches. For
local switches and applications it is difficult to assess but thought
to be relatively low.
Question 3. Business continuity and contingency planning is
particularly important for all public utilities and particularly
telecommunications. To what extent will telecommunications companies
have back-up infrastructure capabilities in the event of power and
transportation failures?
Answer. See 1 above.
Question 4. Discussions on ``Early Warning'' systems assume the 6-
hour follow-the-sun window between New Zealand and Thailand will
provide invaluable warning data. Will you please briefly describe to
the Committee just how the specifics of any Y2K problem will be
propagated at the technical level so all countries can learn and take
advantage of Y2K failure discoveries?
Answer. We have set up a database whereby those Telecommunications
Operators who have `signed up'' to the scheme will have the facility
(password protected) to enter data and receive (read data). The scheme
is restricted to telecomm Operators and Carriers. It will be up to each
individual Operator or Carrier to communicate on a wider basis to both
their own customers and infrastructure providers in the particular
country.
Question 5. The global economy is heavily dependent on
telecommunications due to electronic commerce. How do you suggest that
global companies prepare for alternative methods of communication if
portions of the telecommunications network fail?
Answer. Each individual needs to discuss the specifics of this with
their service provider as this will vary from company to company and
from country to country (e.g. some will permit VSAT whereas others may
not). You will find that most global companies (multi-national
Corporations already have this in hand within their own business
continuity plans.
Question 6. The dates for completion of testing reported in the
survey responses attached to your statement are questionable to the
Committee. If one goes down page after page of the survey responses,
the preponderance of dates for being tested occur on or before the data
of this hearing, July 22, 1999. For instance, 68% of the Western
European companies that responded said they would be tested by now.
Corresponding numbers for other regions are: Africa--55%, Asia/
Australia--66%, Eastern Europe--50%, and the Americas--54%. Have these
companies really made this much progress? Is the ITU doing anything to
independently verify data it is receiving in its surveys on Y2K
readiness?
Answer. If you look at the web site you will see a considerable
number of updates since the date of the hearing. We have made
considerable efforts in this direction following our last meeting (ITU
Year 2000 Task Force) in August held in Toronto.
Progress is checked at workshops that are held in specific parts of
the world, visits to specific countries (recently India, Pakistan and
China) and support missions (predominantly Africa).
The Task Force is made up of volunteers from Telco's giving their
time--we do not have finance available to engage independent auditors.
Question 7. You've stated that the picture that emerges from the
Arab States is ``optimistic.'' Yet in the survey response, there was no
data from these states. Are these states not cooperating in the ITU's
surveys, and if so, can you tell us why? Also, how do you reach the
assessment that there is reason for optimism?
Answer. You have not looked at the data closely enough. Careful
inspection will show many Arab States in the summary but not under a
specific `Arab' heading (see under Africa and Asia). We have, however,
changed the web site and now have a specific North African/Middle East
Section.
Optimism--by talking to the Year 2000 Programme Managers and by
inspection of their plans/program at the workshops we have held.
Question 8. The chart from the Global 2000 group that was referred
to in the opening statements was not as optimistic in the 49 countries
covered as your statement. For instance, only 17 of the 49 countries in
the table were rated as having adequate information and satisfactory
progress. That's only 34% of the countries listed in the chart. Your
statement is much more optimistic. Could you explain the reason for the
difference in these points of view?
Answer. Yes, as I stated in the meeting the Global 2000 chart has
two prime criteria.
a) Progress
b) Information in the public domain
Not all Operators (regrettably) have given sufficient attention to
public disclosure.
If you look at the latest Global 2000 chart (V8.2) you will see a
different picture (more optimistic).
Question 9. Coordination of contingency plans across country
boundaries is an important action to avoid global chaos. For instance,
the International Civil Aviation Organization (ICAO) is coordinating
regional Air Traffic Control contingency plans. Is the ITU or any other
body that you know of taking actions to coordinate country to country
contingency plans so that one country's contingency plan will not hurt
the telecommunications operations of another country or countries?
Answer. You cannot equate Telco contingency plans with that of air
transport, the physical transfer and the means of transmission are
different. Contingency plans are locally based and will not impinge on
another country.
The ITU Year 2000 Task Force has published guidance related to re-
routing of International traffic to mitigate against possible
congestion. This is in addition to the Universal Restoration Manual
that is used and the normal communication (conference Bridge) between
the Network Management Operators Centres of the major telecomm
operators.
__________
Prepared Statement of Gary Beach
My name is Gary Beach and I am publisher of CIO magazine, the
leading publication for chief information officers (CIOs) and other
senior executives who use information technology (IT) to improve their
business. CIO magazine provides current information and case studies on
the effective use of technology. Our readers work in major
corporations, primarily Fortune 1000, and in federal, state and local
government agencies.
My Year 2000 expertise includes daily dialogues with business and
technology executives as publisher of CIO magazine, and my work on the
Steering Committee of YES Corps, an international network of voluntary
Y2K experts supported by the International Y2K Cooperation Center, the
United Nations and the World Bank. The subject of my testimony is
``Global Corporations and Their Exposure to Y2K.''
In June of this year, a public-interest coalition of CIO magazine;
Dr. Ed Yardeni's Y2K Center, a public service of the chief economist of
Deutsche Bank Securities; and Information Systems Audit and Control
Association (ISACA), a recognized global leader in information
technology governance, control and assurance, conducted a Y2K Experts
Poll. The coalition polled Y2K experts in an effort to help the public
and their policy officials assess the Year 2000 readiness of
organizations around the world. The survey addressed Y2K corporate
issues of readiness, confidence, third-party failures, contingency
planning, legal issues, economic impact and the personal at-home
actions of executives close to the Y2K remediation process.
The poll was conducted via the Web. An e-mail invitation from the
three coalition members asked recipients to participate only if they
were professionally and actively involved in Y2K projects. Respondents
linked to an electronic polling form in the e-mail solicitation. CIO
magazine invited CIOs and other high-level executives from its
subscriber list to participate; ISACA invited its worldwide members.
The titles of respondents included accountant/auditor, chief executive
officer, president, chief financial officer, chief technology officer,
information technology consultant, management consultant, Y2K projects
consultant, and manager, director, or vice president of information
technology or information systems. The online poll closed June 16 with
a final, qualified sample size of 892 respondents, a very respectable
sample with a plus or minus error of 3.3 percent.
The majority or 55 percent of respondents were from large, U.S.-
based corporations. Forty-five percent represented firms outside the
United States. Sixty-one percent of respondents reported their firm
employed more than 1,000 employees. The majority of poll participants
were from the financial sector (26 percent), followed by manufacturing
(17 percent), government (9 percent), and healthcare (5 percent).
Respondents were roughly split three ways among IT executives, finance
executives and corporate management.
The Y2K Experts Poll is a snapshot of Y2K readiness among large
global firms with an average of 1,300 partners or suppliers connected
in a worldwide, electronic domino chain.
Now, I would like to present the major findings from the Y2K
Experts Poll that are particularly relevant to this hearing. For your
edification, complete findings of the poll are included with this
testimony.
In the survey, we asked respondents when they expected to finish
all phases of their Y2K projects, including testing. Their responses
indicate 1999 Y2K project completion is moving along, but not
completed. Eighty percent reported they were more than three-quarters
finished. However, 33 percent admitted they were behind schedule. In
addition, 8 percent, or almost one in ten, said they will not complete
their Y2K work until the Year 2000 or beyond.
Keep in mind these are huge, global firms with significant fiscal
and human resources to focus on Y2K. I am concerned that many companies
are behind schedule with only six months left until the immovable
deadline. If a significant number of large, global companies are
lagging, what does that say for small businesses here and abroad? Small
companies simply do not have the same level of manpower and resources
as big companies.
Nowhere have I seen data, until this poll, that quantifies the
percentage of large firms that admit they are not going to make the
turn-of-the-century deadline. The fact remains, no one knows what will
happen if organizations are not ready for the millennium. What this
data does show us is that some large, global companies already know
their computerized systems will not be ready in time. The consequences
could range from minor inconveniences like a disruption in utility
service to widespread economic, social and political upheaval. Given
the range of outcomes, businesses should obviously make every effort to
prepare for the Year 2000.
Respondents were also asked to characterize their organizations'
contingency planning. The poll found 49 percent of companies had a
contingency plan and 50 percent did not have one or were still in the
process of creating one. Of the respondents with a contingency plan, 60
percent said they were already implementing it. Contingency plans could
include training employees how to perform tasks manually versus via
computer. The poll also found contingency planning by this group of Y2K
experts did not include significant stockpiling of business materials,
supplies or products. Thirty-four percent of companies said they were
not stockpiling; 19 percent of companies said they were preparing to
have two to seven days of extra inventory on hand. Translation: more
than likely, any economic disruptions will be triggered by fear, not by
additional inventory stockpiling.
We also asked firms about their supply chain, specifically how they
were assessing their vendors' Y2K preparedness as well as what
percentage of their vendors were not Y2k ready at the time of the poll.
We found 12 percent of large companies were verifying their business
partners' Y2K readiness by conducting on-site visits. Forty-eight
percent of respondents had sent out questionnaires followed by
telephone calls. 20 percent had sent out questionnaires with no
telephone follow up, and 13 percent were having informal conversations
with their partners about the state of their readiness. Mr. Chairman,
Y2K readiness is not a topic to be relegated to the level of informal
conversations.
In my face-to-face personal conversations with CIOs, many tell me
they think they will be ready. But, when I ask about their partners,
their eyes drift toward the floor and they say they don't know. They
cannot verify their trading partners' readiness. I am concerned that
large corporations are not taking the danger of supplier failure
seriously enough. Why not? Three reasons come to mind: 1) time, there
is not enough of it to verify the Y2K readiness of the supply chain, 2)
expense, corporations are extended fiscally simply getting their own
house in order and 3) logistics, how can they possibly manage the
complexities of verifying the Y2K readiness of 1,300 other companies?
Too many businesses appear to be relying heavily on trust. Companies
are more rigorous when it comes to preparing routine legal contracts.
In this case, we are talking about the potential for serious
repercussions.
Globally speaking, supply chain readiness poses its own set of
problems. While American multinational corporations may be able to
exert leverage with domestic trading partners, they may have much less
leverage with some of their critical supply-chain partners overseas,
namely government-owned telecommunications and electrical utilities in
foreign countries. Often national governments operate these services
and there are few, if any, alternate commercial providers.
The supply chain, which is heavily interconnected, may seriously be
affected by incomplete or no delivery of Y2K-compliant mission-critical
software. Thirty-five percent of large firms said they have not
received Y2K-compliant versions of mission-critical software programs
from third-party vendors.
We asked respondents if any of their mission-critical systems were
expected to fail or malfunction as a result of Y2K. One of the most
daunting statistics from our survey was that these large firms expected
3 percent of their mission-critical systems to fail or malfunction.
Again, we are talking about mission-critical systems. Some large
companies, providing anything from utilities to consumer products, may
not be able to provide people with the necessities they rely on like
food, water and electricity. Furthermore, 3 percent of respondents said
they expect major problems in their telecommunications service; and 2
percent said they expect major problems with their electrical service.
So there will be problems, not widespread, but major problems
nonetheless.
It is clear that not every company is going to make the January 1,
2000 deadline. There is good reason to believe that mission-critical
software is not going to be delivered in time. I'd like to leave this
committee with the following call to action. By September 30, 1999,
organizations should be compelled to have a contingency plan in place.
To help them accomplish this goal, the Senate Special Committee on the
Y2K Technology Problem could provide answers to frequently asked
questions about ``How To'' develop a contingency plan. This information
must be made available online.
CIO magazine, ISACA and Dr. Ed Yardeni's Y2K Center will be
conducting a second Y2K Experts Poll in September. At that time, it
will be interesting to note the percentage of contingency plans
companies have created and put into place as well as whether the
mission-critical software delivery numbers change.
Thank you for the opportunity to share my testimony and the data
from the Y2K Experts Poll with you.
__________
Responses of Gary Beach to Questions Submitted by
Chairman Bennett
Note: A substantial portion of Gary Beach's testimony before the
Committee was based on the first Y2K Experts Poll (6/99). Since the
hearing, CIO Communications, Dr. Ed Yardeni's Y2K Center and ISACA have
conducted a second poll (9/99). Wherever possible, we used the most
recent data to help answer the questions.
Question 1. Your survey of 982 Y2K experts indicated that 35% of
large firms do not have compliant software to implement
interconnectivity in their supply chain. Where does the fault lie for
this critical weakness and who is going to fix it? How are they able to
complete necessary Y2K testing without compliant third party software
and will there be time available to complete testing once compliant
software is attained?
Answer. In my opinion, the responsibility for not having a Y2K
ready supply chain lies mainly with the user corporation which was
probably late to realize the seriousness of the situation. For
manufacturers of Y2K compliant software whose products may be late to
market, the culpability lies in poor development processes or to a
lesser extent the inability to hire information technology (IT) workers
to actually build the software.
As for who will fix the weak link, it will likely have to be a
combination of the organization experiencing or identifying any Y2K
fallout with support from their external IT suppliers and/or
consultants.
The longer a user corporation waits to install and then test Y2K
remediation software, the greater the risk. Why? A piece of software
may fix problem ``A'' but create problem ``B''. As time draws closer to
the 12/31/99 rollover, there is just not enough time, money or human
resources to address the digital domino scenario for those who are
behind the eight ball. If an organization doesn't receive the necessary
Y2K compliant third party software, there is no hope of completing Y2K
testing on time.
Question 2. Your poll is not reassuring for business operations
continuity. How do you see contingency planning, your principle
recommendation, filling in the continuity gap left by Y2K failures in
the five months remaining?
Answer. The Y2K Experts Poll is a snapshot of Y2K readiness among
global, large firms with an average of 1,360 suppliers. For this kind
of corporation, there is little hope of entirely avoiding Y2K mishaps.
Contingency planning must include first and foremost, prioritizing
firms and processes in the supply and manufacturing chains that are
essential to the continuation of the firm. Contingency steps must then
be planned to allow a firm to continue the delivery of goods or
services if a Y2K problem strikes. Therefore, the most essential step
of contingency planning is the isolation of the processes and the
partners absolutely necessary for the business to survive.
Question 3. The Committee has been told that contingency planning
requires in depth employee training to be effective in business
continuity. Did your poll delve into the specifics of how Y2K
contingency plans will be implemented?
Answer. No, the poll didn't delve into that area. But, in addition
to creating contingency plans for their employees, smart corporations
are also working with employees of critical partners and employees of
critical customers to help ensure that important employees in the
supply chain are ready to handle any disruptions in business as usual.
A separate research initiative, conducted by our sister company IDC
Research, presents an overview of contingency plans. The IDC report,
Y2K Compliance and the Impact on ICT Spending: An Analysis by Company
Size and Industry (Azzara, 8/99), supports the fact that most companies
had some form of contingency plan in place, be that in the form of
written procedures, designated SWAT teams, proactivity with partners,
or a combination of these plans. Multiple plans were implemented
primarily in companies that fall into the mid- to large-sizes. IDC
(Azzara, 8/99) also identified strategy use by industry. We are able to
see from this research that:
Over 50% of each of the following industries have implemented
Written Procedures as part of a contingency plan: Banking
Depositories, Insurance Companies, Discrete Manufacturing,
Healthcare Services, and Utilities;
Over 50% of each of the following industries have implemented
Designated SWAT Teams as part of a contingency plan: Banking
Depositories, Communications, Transportation, and Utilities;
Less than 50% of each of the following industries have
implemented Proactivity with Parnters as part of a contingency
plan: Financial Services, Communications, Wholesalers,
Retailers, and Other Services.
A chart showing these facts is included with this document.
Question 4. You noted that 60% of corporations with contingency
plans are already implementing them. Would you please briefly
characterize what that really means and what they are in response to?
Answer. The main contingency activity underway is making certain
that a firm has enough materials and supplies to continue
manufacturing/delivering goods or services and having enough finished
goods in inventory to sell if a supply chain partner has a serious Y2K
problem.
Another activity smart companies are undertaking is training their
workers how to perform their duties the old fashioned way (i.e.,
manually). For example, airlines ought to school their reservations
staffs on how to manually write out tickets in case computers
malfunction, and retailers/restaurants ought to show their workers how
to manually write up sales via old fashioned credit card charge slips,
etc. in case of telecom or computer glitches.
Question 5. Do the 8% of firms that indicate they will not be Y2K
compliant by the year 2000 fall into identifiable categories of
companies that can have a critical business impact on our economy?
Answer. Technology limitations do not allow us to drill down and
answer this question. Additionally, we suspect the sample bases would
not be large enough to project reliable results.
Question 6. Would you discuss your Y2K concerns about foreign-
government-owned telecommunication monopolies that support global
businesses? We have an ITU representative, Mr. Ron Balls, here that
perhaps can provide some answers during his testimony.
Answer. The concern is this: while these government-owned telecoms
are now fully aware of the potential problem of Y2K on their countries,
because of their monopolistic positions, many realized the seriousness
of Y2K too late and are now in the unfortunate position of playing
catch up without resources or time to complete the necessary work.
Question 7. Your poll indicated that 33% of respondents admitted
they were behind schedule. This is very significant and gives one pause
as they look at self-reported scheduled completion dates. Would you
briefly address to what degree they are behind schedule? What are the
primary root causes of the schedule slippages? Do those that reported
being behind schedule fall into any particular categories?
Answer. Nearly one in three firms continues to be behind in Y2K
preparation, remediation and testing. Sixteen percent are 1-4 weeks
behind, 8% are 5-8 weeks behind and 6% are more than 8 weeks behind (9/
99) Y2K Experts Poll. Root causes of this situation clearly, in my
mind, lay with poor management execution and the fact that some firms
underestimated the time necessary for testing. Y2K is and always has
been a management challenge, not an excessively difficult technical
challenge. Some firms may be behind because they are waiting for the
delivery of Y2K compliant software. . .and some because they are
unable to hire enough workers to remediate the software code. But the
major reason is this: some businesses did not properly plan their work.
Again, technology limitations do not allow us to drill down and
answer your question about whether the firms who are behind schedule
fall into particular categories. Additionally, we suspect the sample
bases would not be large enough to project reliable results.
Question 8. You testified that, more than likely, any economic
disruptions would be triggered by fear and not by additional inventory
stockpiling. Given that the greatest number of respondents were from
the financial sector, how likely is it that this is representative of
other industries?
Answer. Since it is widely believed that the financial sector is
one of the best prepared industries, the Y2K Experts Poll results are
more optimistic than they might be otherwise.
According to our polling partner and noted economist forecaster,
Dr. Ed Yardeni, his primary concern is neither stockpiling nor fear but
rather possible disruptions in computer systems that run just in time
manufacturing which could lead to a recession.
Question 9. Did your poll look into the critical dates that
corporations are preparing for other than the change from December 31,
1999 to January 2000? For example, how many are looking at and
preparing for possible problems on 9/9/99 or February 29, 2000 to March
1, 2000?
Answer. No.
__________
Prepared Statement of Chairman Robert F. Bennett
Good morning and welcome to today's hearing. The global
corporations that have provided us with witnesses today play an
instrumental role in sustaining America's economic strength, and have
helped create a level of prosperity nearly unrivaled in American
history. The success of these companies is vital for our nation's
continued economic growth on the world stage, and we want to ensure
that adequate preparations are underway for the Year 2000 technology
problem.
The fates of these companies are linked in some fashion to the
ever-changing state of international affairs. Locating a business or
subsidiary abroad means becoming vulnerable to potential political,
economic and infrastructure disruptions in another country. Just as Y2K
poses challenges in our own country, companies overseas may be at risk
of electric and telecommunications failures, and to the snapping of
critical distribution and supply chains that cross international
borders. For these companies, preparing for Y2K is a task that involves
not only American know-how, but also the efforts of overseas
governments, subsidiaries, partners, vendors, suppliers and facility
managers.
The growth of global corporations has accelerated over the past
three decades. In 1970, just before the advent of the microchip, some
7,000 parent global corporations existed. Today, that number has soared
to 38,000. It is no coincidence that the number of global corporations
has increased with the corporate community's widespread use of high-
tech, information-age business systems.
Global corporations have always comprised an important thread in
the complex web of global economic interdependence between nations. In
many cases, American companies act as economic and cultural emissaries,
expanding free trade and opening markets, spreading democratic values,
and bringing higher standards of living for working people across the
globe.
The information age presents global corporations with unprecedented
opportunities to build new, international relationships that are
beneficial for the United States and its economic partners. But the
same high-tech systems that benefit many companies also contain
inherent weaknesses. Instantaneous communications; and just-in-time
inventory, manufacturing and transportation systems are all vulnerable
to the Y2K problem.
Assessments of the Y2K preparedness of the international community
are numerous and vary greatly, demonstrating the range of uncertainty
that exists globally. Because of these uncertainties, major
shareholders in the global economy must assess their options and
establish realistic and practiced Y2K contingency and business
continuity plans. With only 162 days remaining in 1999, there is still
much work to do.
I look forward to hearing the testimony from our witnesses. The
companies represented here today have developed exemplary Y2K programs
and established themselves as leaders. The Committee is grateful for
the commitment that you and your companies have made to publicly
address this worldwide problem. I must also note that McDonald's Corp.,
which has more than 24,500 restaurants in 115 countries, was unable to
honor an invitation to testify at this hearing, but has offered to
testify at a future date. This committee looks forward to adding their
testimony to this important public record. Thank you.
__________
Prepared Statement of Jacquelyn L. Williams-Bridgers
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify before your committee on
Year 2000 (Y2K) global readiness and international trade. The Y2K
problem is one of the most challenging project management and systems
conversion efforts ever faced by the world community. As you know, the
Department's challenge in addressing Y2K extends well beyond its
Washington headquarters, because failure of systems in countries
hosting U.S. Government organizations and U.S. businesses has the
potential to disrupt this country's ability to carry out its foreign
affairs agenda and protect U.S. interests abroad in the year 2000. In
the context of this hearing, those interests include the conduct of
international trade, which is threatened by potential Y2K-related
failures in key infrastructure sectors, such as telecommunications,
transportation, and energy.
SUMMARY
At your March 1999 hearing on international Y2K issues, I provided
an overview of global Y2K readiness based on host country assessments
developed by U.S. embassies and on our own visits to 25 sites in 20
countries. My testimony discussed Y2K readiness in terms of the varying
levels of progress the different countries had made in assessing and
fixing their systems-and the message was decidedly mixed:
Industrialized countries were well ahead of the
developing world; however, some of those locations were at risk of
having Y2K-related failures because they were late in establishing Y2K
leadership at the national level, and because they were heavily reliant
on computer technology in key sectors;
Developing countries generally were lagging behind and
were struggling to find the financial and technical resources needed to
resolve their Y2K problems; and
Former Eastern bloc countries were late in getting
started and were generally unable to provide detailed information on
their Y2K programs.
Over the past 4 months my office has continued to be actively
engaged with the Department of State and our embassies and consulates
overseas to assist them in meeting the millennium challenge. Of
particular interest to your Committee, my office has also continued to
assess Y2K readiness in the international arena. For this hearing on
Y2K and international trade issues, we are providing our assessment--
based on information from our embassies, from our own visits, and other
sources--of the risk that Y2K might cause failures in key sectors in
countries around the globe. With less than 6 months to go before the
date change, the message again is mixed:
Approximately half of the 161 countries assessed are
reported to be at medium to high risk of having Y2K-related failures in
their telecommunications, energy, and/or transportation sectors. The
situation is noticeably better in the finance and water/wastewater
sectors, where around two-thirds of the world's countries are reported
to have a low probability of experiencing Y2K-related failures;
Industrialized countries were generally found to be at
low risk of having Y2K-related infrastructure failures, particularly in
the finance sector. Still, nearly a third of these countries (11 out of
39) were reported to be at medium risk of failure in the transportation
sector, and almost one-fourth (9 out of 39) were reported to be at a
medium or high risk of failure in the telecommunications, energy or
water sectors;
Anywhere from 52 to 68 developing countries out of 98
were assessed as having a medium or high risk of Y2K-related failure in
the telecommunications, transportation, and/or energy sectors. Still,
the relatively low level of computerization in key sectors of the
developing world may reduce the risk of prolonged infrastructure
failures; and
Finally, and similar to the developing world, key sectors
in the Newly Independent States and other former Eastern bloc nations,
are a concern because of the relatively high probability of Y2K-related
failures.
These assessments suggest that the global community is likely to
experience varying degrees of Y2K-related failures in every sector, in
every region, and at every economic level. As such, the risk of
disruption will likely extend to the international trade arena, where a
breakdown in any part of the global supply chain would have a serious
impact on the U.S. and world economies. In light of all this, the
challenge now facing the United States is to encourage and facilitate
contingency planning by individual countries, their regional partners,
and by international organizations such as the United Nations.
Department of State International Y2K Efforts
The Department of State has long recognized that the potential for
Y2K vulnerability is not restricted to its domestic operations and has
implemented measures to assess the Y2K readiness of all countries where
the United States has a diplomatic presence. These measures include the
following:
In November and December 1998, the Department's embassies
and consulates used a standard survey to collect information on the
effectiveness of host countries' Y2K programs, vulnerability to short-
term economic and social turmoil, reliance on technology in key
infrastructure sectors, and the status of Y2K correctional activities.
The information from this survey, as well as from other sources, such
as the World Bank, United States Information Agency, and this office as
well, was analyzed by staff under the direction of the National
Intelligence Council.
On January 29, 1999, the Department issued a worldwide
public announcement on the Y2K problem to inform U.S. citizens of the
potential for problems throughout the world because of the millennium
``bug.'' The notice cited specific areas of concern, including
transportation systems, financial institutions, and medical care, as
activities that may be disrupted by Y2K-related failures. Further, this
announcement goes on to warn that all U.S. citizens planning to be
abroad in late 1999 or early 2000 should be aware of the potential for
problems and stay informed about Y2K preparedness in the locations
where they will be traveling.
In February 1999, the Department provided all of its
embassies and consulates with a Contingency Planning Toolkit. The posts
were instructed to use the toolkit to assess the probability that Y2K-
related failures might occur in key infrastructure sectors, including
finance, telecommunications, transportation, energy, and water/
wastewater treatment. Based on this assessment, posts were to develop
contingency plans and identify the resources (generators, radios, etc.)
needed to handle Y2K-related emergencies. As of the end of June 1999,
nearly all of the Department's posts had completed their host country
infrastructure assessments and developed draft contingency plans.
In June 1999, the Department provided additional
instructions to its embassies and consulates on how they should
approach host governments concerning Y2K issues. Posts were asked to
discuss with the host government its assessment of Y2K readiness in the
country; gain a deeper understanding from the local authorities about
what remedial actions and/or contingency plans are contemplated; and
inform the host government that the Department has a responsibility to
notify American citizens if it is aware of credible and specific
threats to their safety and security, including Y2K problems in
critical sectors. The Department hopes that approaching all countries
now with this information will spur them to either correct the problems
or to take remedial actions, such as contingency planning.
In mid-August of this year, the Department plans to notify select
host country governments of its concerns about Y2K-related problems
that could affect American citizens living or traveling in those
countries. The Bureau of Consular Affairs will bring these concerns to
the attention of the traveling public in September, when it issues
Consular Information Sheets concerning Y2K.
OIG Year 2000 Oversight Efforts
International Y2K Efforts: Host Country Preparedness
My office has continued its activities in international Y2K issues
through our efforts to engage host country representatives and promote
information sharing and cooperation. We analyzed Y2K Host Country
Infrastructure assessments submitted over the past 2 months by U.S.
embassies in 161 countries: 98 in the developing world, 24 from former
Eastern bloc countries and the Newly Independent States, and 39 from
industrialized countries.
OIG has continued to meet with host country Y2K program managers;
representatives from key infrastructure sectors, such as utilities,
telecommunications, and transportation; and with private sector
officials to discuss their respective Y2K programs and to share
information. A summary of OIG international Y2K site visits is provided
in Table 1.
The information we collected about host country readiness provides
general insight into a host country's efforts to reduce the impact that
Y2K-related failures might have. This information represents the
situation at a particular point in time. OIG visits began in September
1998, and the situation in some of those locations may have changed
since then.
OIG has provided information summaries on each of these countries
to appropriate Department staff, the President's Year 2000 Conversion
Council, the United States Information Agency, congressional
committees, and to other foreign affairs organizations.
Results of OIG International Y2K Risk Assessments
Based on our work in the countries cited above and on our
assessment of other information provided by the Department, a number of
themes have emerged relating to the potential impact the Y2K problem
may have in the global arena. Our work has resulted in the following
findings:
Significant Risk of Y2K-Related Infrastructure Failures Worldwide
With less than 6 months to go before the Y2K date change,
approximately half of the world's countries are reported to be at
medium to high risk of having Y2K-related failures in their
telecommunications, energy, and/or transportation sectors. As shown in
Table 2 below, the situation is noticeably better in the finance and
water/wastewater sectors, where about two-thirds of the world's
countries are reported to have a low probability of experiencing Y2K-
related failures. The financial arena is considered to be at low risk
from Y2K in most countries; however, worldwide, the finance sector is
vulnerable because of its reliance on other, more risky sectors,
including energy and telecommunications.
See Chart 1 in the appendix for a visual depiction of this table.
Low Risk of Y2K-Related Failures in Most Industrialized Countries
Industrialized countries were generally found to be at low risk of
having Y2K-related infrastructure failures, particularly in the finance
sector. As Table 3 shows, however, nearly a third of these countries
were reported to be at medium risk of failure in the transportation
sector, and almost one-fourth were reported to be at a medium risk of
failure in the telecommunications, energy, or water sectors. Because
industrialized countries are highly dependent on computer technology in
every sector, the potential impact of Y2K-related problems is much
higher than in the developing world. Some examples of problems or
issues found in our evaluation of industrialized countries' Y2K
readiness are as follows:
During our visit to Malaysia, we learned that the
banking, electricity, and transportation sectors were generally in the
advanced stages of remediation (fixing or replacing a system) and
testing. Further, the government and business sectors are developing
organizational, sector, and national contingency plans as part of their
Y2K preparations. There is some concern about the Malaysian
telecommunications sector, which was about 79 percent through the
remediation stage as of May 1999, because of a lack of detailed
information.
During our visit to Seoul, we learned that except for
banking and telecommunications, the public and private sectors of Korea
got off to a late start in addressing Y2K issues. Now, both the
government and private sector organizations are reporting remarkable
progress in remediating and testing their systems. However, we are
concerned that the late start and the economic recession (which has
also affected other Asian countries) means they may not be able to
complete all necessary work and do a thorough job of remediation and
testing.
Taiwanese authorities and large business enterprises have
made a great deal of progress in addressing Y2K issues. During our
visit to Taipei, we were told that key parts of the infrastructure
appear to be in compliance or close to it, and the government is
preparing its contingency plans for water, transportation, and power.
For example, the Central Bank and the Bank of Taiwan were tested and
certified by the Ministry of Finance in April 1999. However, the Y2K
readiness of small and medium enterprises as well as small medical
facilities remains a big question.
A June 1999 embassy assessment of one European country,
which will be hosting many large-scale millennium events that will be
attended by thousands of Americans, expressed skepticism about the
country's telecommunications sector because of a lack of information.
The assessment further noted that water and wastewater efforts were
inconsistent, health care preparations were inadequate, but finance was
in good shape.
The Y2K readiness of ports and the ships entering those
ports continues to be a worldwide concern. For its part, the French
Ministry of Transportation has indicated it does not support closure of
French ports on December 31, 1999. It suggests that ships moored in
French harbors do not attempt to maneuver on December 31, 1999. Ports
and the French Navy will have emergency tugboats on red alert on
December 31, 1999 should a ship come ashore.
At a roundtable discussion in one Middle Eastern country,
businessmen expressed concern about the country's preparedness for Y2K
and the potential effect on business. In addition to potential problems
with utilities (water and power supply) and telecommunications, the
business leaders were concerned about medical services, food
distribution, and the aviation system. One report suggests that water
may be the weakest link in Y2K preparedness in the region. A Y2K expert
in a major city in this country advised that the city only has a 1-day
supply of water and noted that staff responsible for the desalinization
plants decided to turn the computers back to the year 1995, ``until
they can figure out how to fix the problem.''
Contrary to the bad press concerning Japan's Y2K
readiness, during our visit to Japan in May of this year, we concluded
that Japanese ministries and companies had been working quietly toward
compliance, but until recently little information on their progress was
available in English. The Japanese acknowledge they got off to a late
start in addressing Y2K, and this may hamper their ability to
thoroughly address the problem before the end of the year.
See Chart 2 in the appendix for a visual depiction of this table.
Higher Risk of Y2K-Related Failure in Developing Countries
Anywhere from 52 to 68 developing countries out of 98 were assessed
as having a medium or high risk of Y2K-related failure in the
telecommunications, transportation, and/or energy sectors, as shown in
Table 4. Although the financial sector was rated as a low risk in about
60 percent of these countries, its ability to continue functioning is
questionable because of its heavy reliance on other sectors, such as
telecommunications and energy, which are more likely to have Y2K-
related problems. The relatively low level of computerization in key
sectors of the developing world may reduce the risk of prolonged
infrastructure failures. Examples of some specific problems or issues
facing developing countries are as follows:
There is reported progress in India's Y2K readiness in
the last 6 months, especially in the critical sectors of banking and
finance, civil aviation, and telecommunications. But nowhere is the Y2K
process complete, and contingency planning has barely begun. Most
worrisome is the potential vulnerability of the 70 percent of the
electrical power sector controlled by the State Electricity Boards,
large parts of which only now are beginning basic inventories and
assessments. However, the power companies we contacted during our visit
reported no Y2K issues in generating, transmitting, and distributing
electricity.
There is now cautious optimism concerning Y2K readiness
in China, compared to the situation a few months ago. China's Y2K
representative and other speakers at a Y2K conference in Beijing in May
expressed confidence in China's electric grid, but also expressed
concerns about the effect of Y2K on railroad freight, medical devices,
and embedded chips. Following the conference, a Y2K article in the May
25, 1999, People's Daily decried widespread public ignorance and apathy
about Y2K in China. The journalist estimated that 70 percent of the
large- and medium-sized manufacturers in China do not take Y2K
seriously. The author also noted that China may be vulnerable because
of its use of many obsolete computers and pirated software. In
addition, the computer systems people sometimes do not know just what
is on their system. For its part, the Chinese government is conducting
a Y2K triage, focusing limited resources on critical public utilities
(water, electricity, public health, and transportation) as the top
priority and then on key industrial sectors. The Chinese authorities
expect some Y2K problems but nothing that will put people's lives in
danger or cripple the economy.
In Vietnam, because there is a low level of computer
usage, there is a relatively low threat of Y2K-related failures.
Vietnam's economy is largely agrarian and based on cash, rather than
electronic transactions. Further, it was difficult obtaining
information about Vietnam's Y2K readiness because the government
tightly controls the information and Y2K issues are not widely
publicized. The government keeps certain things like maps, drawings,
electrical diagrams, and financial figures a state secret. We did learn
that one dam that provides about 80 percent of the electricity to
Vietnam uses Russian equipment that probably has embedded chips whose
Y2K readiness is questionable.
On June 1, 1999, the Ethiopian National Y2K Committee
advised that Ethiopia has completed its Y2K assessment, and remediation
is still underway. The cost of Y2K remediation is estimated at $18.7
million. The air transport, electricity, and water sectors all appear
to be compliant, but the telecommunications sector is lagging. Some
sectors are testing now testing their systems for Y2K compliancy, but
little attention has yet been given to contingency planning.
See Chart 3 in the appendix for a visual depiction of this table.
Significant Risk of Y2K-Related Failures in Former Eastern Bloc
Countries
Finally, and similar to the developing world, key sectors in the
countries that were part of the Eastern bloc including countries that
were part of the former Soviet Union have a relatively high probability
of Y2K-related failures. Specifically, as shown in Table 5, 14 of the
24 countries in this category were assessed as being at medium or high
risk of Y2K-related failure in the telecommunications sector, 15 at
medium or high risk in the transportation sector, and 17 as being at
medium or high risk in the energy sector. Nearly all of the Eastern
bloc countries evaluated are at least partially dependent on computers
for such key sectors as finance, telecommunications, utilities, and
transportation. Some examples of problems faced by countries in this
category are:
On June 17, 1999, Russian President Boris Yeltsin signed
a Presidential decree that declares that the Y2K problem is one of the
utmost urgency and assigns responsibilities to government
administrators at all levels. The Duma and Federation Council followed
suit with a new law that provides that owners and operators of computer
equipment and systems are to be held accountable for assuring Y2K
compliance. The nuclear sector reports that all safety systems are Y2K
compliant, and provisions are being made to ensure that back-up power
will be available. Plant operations computers may have undiagnosed
problems that could force a shutdown, but we expect safety systems will
work as needed. There is, however, excess generating capacity within
the electrical grid, which would allow for continued provision of power
to high-priority customers even in the event all nuclear power plants
shut down. On the other hand, we still have some unanswered questions
with respect to the telecommunications sector, and are endeavoring to
learn more about possible impacts. The Department of Energy, the
International Atomic Energy Agency, the International Science and
Technology Center, and the International Energy Agency are all engaged,
with U.S. support, in assisting Y2K remediation in Russia, the first
three specifically in nuclear power plants.
Although until recently the electricity supply has been
relatively stable in Poland, there is rising concern that the country
will experience limited problems due to power generation failures.
Primarily, such power losses will be localized failures, easily or
quickly remedied. In addition, telecommunications may be a problem. If
the local telephone system fails, greater emphasis will be placed on
the use of cellular phones, already prevalent in Poland. This increased
use could cause an overload on the bandwidth, thereby resulting in its
failure also.
One Balkan country's Y2K efforts were reported as
disorganized and underfunded, but with some positives. While the
telecommunications, air transportation, and financial sectors are
largely compliant, or likely will be by year-end, other sectors,
including water purification, rail transportation, and the all
important energy sector appear to be lagging far behind.
The government of one former Eastern bloc country has
assured the U.S. embassy that there will not be serious interruptions
in critical sectors, including energy, transportation, water, and
emergency services. The country has established a new Y2K strategy with
a new Y2K commissioner; however, the program provides no deadlines and
no new money, raising questions about the government's assurances about
Y2K readiness.
The official in charge of another Eastern bloc country's
Y2K readiness program told embassy staff that it had the know-how to
correct its Y2K problem, but lacked the financial means to implement
the changes.
See Chart 4 in the appendix for a visual depiction of this table.
Need for Y2K Contingency Planning on a Global Scale
Y2K-related disruptions in the international flow of goods and
services are likely, but no one knows exactly where, when, and to what
extent such disruptions will occur. Because disruptions could seriously
impact the world's economies, including our own, the Department of
State needs to take the lead on behalf of our government in
facilitating global contingency planning.
In 1998, world trade totaled over $5 trillion, and the United
States accounted for nearly 13 percent of that total. The global
trading system consists of a complex network of suppliers,
distributors, service providers, and customers. An infrastructure of
energy supplies, transportation systems, telecommunications networks,
and financial organizations support this system. Disruptions in this
infrastructure, and the relationships among suppliers and customers,
will negatively affect individuals, firms, industries, governments, and
national and regional economies around the world.
As I discussed earlier in this statement, our Y2K assessments
suggest that the global community is likely to experience some Y2K-
related failures in every sector, country, and region. The
international economy is vulnerable because Y2K-related failures in the
supply chains of one country or region might disrupt the ability of
other countries to keep their factories working, transportation systems
running, food supplied, and people employed. Work is underway around
the world developing contingency plans to ensure continued functioning
of governments, infrastructures, businesses, and supporting
organizations within individual countries, but little is being done to
consider potential supply chain disruptions originating in other
countries and how they should be handled.
The Department can take the lead for the U.S. Government in
facilitating global Y2K contingency planning. With assistance from
other Federal agencies such as the departments of Commerce, Energy, and
Transportation and the Federal Emergency Management Agency, the
Department needs to work with international government, industry, and
consumer organizations to ensure that global contingency plans are
prepared for key infrastructure and industry sectors. To do this, the
Department can be most effective by leveraging the efforts of
international organizations such as the United Nations, the Asia-
Pacific Economic Cooperation, and other entities that have active Y2K
outreach programs. In addition, this effort should include applying
lessons learned from recent disasters (i.e., the December 1998 ice
storm in Williamsburg, Virginia and the 1996 Kobe earthquake) in such
sectors as transportation, power, and telecommunications. Further,
there must be special emphasis on contingency planning for small and
medium enterprises of 500 or fewer employees that represent
approximately 98 percent of the supply chains in most countries.
By promoting a global approach to Y2K contingency planning, the
Department of State, on behalf of the U.S. Government, can help
strengthen the ability of all countries to deal with potential
disruptions in international trade.
OIG work within the Department of State
OIG is also playing a significant role in assisting the Department
to meet the millennium challenge facing their respective information
technology infrastructures, including computer software, hardware, and
embedded devices. The Department has recognized that it is vulnerable
to the Y2K problem, and over the past 2 years has taken steps to
remediate its systems and infrastructure to prevent disruptions to its
critical business processes.
The Department has established a Year 2000 Program Management
Office (Y2K PMO), which is responsible for the overall management of
the Y2K program within the Department. The Y2K PMO is responsible for
tracking and reporting on the progress being made by the bureaus in
remediating systems, providing technical advice and assistance, issuing
contingency planning guidance, and certifying systems for Y2K
compliancy. As of May 14, 1999, the Department reported that it had
tested, validated, and implemented 100 percent of its mission-critical
systems.
My office has assisted in establishing a process through which the
Department can certify the Y2K compliancy of its mission-critical
systems, by writing detailed guidelines that each bureau must use in
developing application certification packages for submission to the Y2K
PMO. The three-tiered process which resulted is, we understand, one of
the most rigorous in the Federal Government. It provides the
Department's senior management with assurance that every feasible
effort has been made to prevent Y2K-related failures on January 1,
2000.
First, using the certification guidelines, the bureaus that
remediate mission-critical and other critical applications conduct
tests to verify Y2K compliance of each system. For the second step in
this process, the complete Application Certification Packages, which
include the test plans and test results, are independently reviewed by
the Y2K PMO team specifically contracted for this purpose. In the final
step, through an agreement with the Under Secretary of State for
Management, OIG is reviewing the adequacy of all certification packages
for mission critical systems before they are provided to the Y2K
certification panel and approved by the Department's Chief Information
Officer. This approach assures that all applications undergo strict
independent verification and validation standards to prepare for Year
2000. Thus far, the OIG has evaluated and provided comments to the
Department on 17 mission-critical application certification packages,
and 13 of those have been officially certified.
Finally, in March 1999, the Department initiated planning to
conduct end-to-end testing of its core business functions. The purpose
of end-to-end testing is to ensure that the Department can maintain its
core business functions on and beyond the rollover to the Year 2000.
The Department's end-to-end test checks the critical transaction flows
through the organization across the major business functions,
applications, and vendor products that support these transactions.
Toward that end, the Department has organized its end-to-end testing
around five different clusters, each of which combines a number of
related business functions. For example, the Business Management
Cluster includes such processes as personnel actions, financial
management, and logistics. The other four clusters are Passports and
Global Consular Systems, Command and Control Communications, E-mail,
and Security and retesting as needed. The Department plans to have
completed all end-to-end testing of its five business clusters by
September 30, 1999.
In summary, Mr. Chairman, with less than 6 months to go before the
Y2K date change, the global picture that is slowly emerging is cause
for concern. Our assessments suggest that the global community is
likely to experience varying degrees of Y2K-related failures in every
sector, in every region, and at every economic level. In some
countries, these failures could be a mere annoyance, such as a
malfunctioning credit card terminal, while in others there is a clear
risk that electricity, telecommunications, and other key systems will
fail, perhaps creating economic havoc and social unrest. As such, the
risk of disruption will likely extend to the international trade arena,
where a breakdown in any part of the supply chain would have a serious
impact on the U.S. and world economies.
At this stage, it would be prudent to recognize that Y2K-related
failures are inevitable, both here and abroad. As such, the efforts by
this Department and other international organizations will be
instrumental in minimizing the impact that Y2K may have on the global
community.
This concludes my statement. I would be pleased to answer any
questions you may have.
__________
Responses of Jacquelyn L. Williams-Bridgers to Questions Submitted by
Chairman Bennett
Question 1. To what extent is the State Department involved in
assisting the Y2K business continuity plans of U.S. global companies in
foreign countries, and what is your appraisal of their successful
outcome?
Answer. The State Department provides information on host country
Y2K preparedness and key sector infrastructure to Americans traveling
and residing abroad. The Department obtains such information through a
variety of contacts--both public and private--that provide information
on services such as electricity, telecommunications, water, etc. The
State Department also meets and shares information with American
Chambers of Commerce chapters overseas. Other Federal agencies such as
the Departments of Commerce and Transportation also develop information
on the host country, which is shared with American companies and
citizens. The responsibility for developing business continuity plans
is that of the global companies.
The successful outcome is dependent on the accuracy of the
information obtained and the plans developed where information is not
certain. Those companies that are able to respond to infrastructure
failures in different ways will most likely be less impacted. Those
companies that ``place all their eggs in one basket'' and that do not
have alternative tested plans will suffer more negative consequences.
As I have testified, there will be problems throughout the world;
how we handle those problems will determine if Y2K is an annoyance or a
catastrophe.
Question 2. Since the global economy is Y2K dependent, does the
State Department have a roving Y2K team to assist other countries in
preventing or mitigating Y2K failures?
Answer. The State Department does not have a roving Y2K team. The
Department of Commerce has been providing seminars worldwide on how
small and medium-sized enterprises can address Y2K issues in their
sphere of influence. The Agency for International Development has been
reviewing systems for infrastructure building that they have funded.
The Departments of Energy and Defense have been working with
personnel in key areas such as Russia to resolve Y2K technical
problems. Additional areas are under discussion.
Question 3. You testify that the Y2K readiness of ports and ships
entering those ports continues to be a worldwide concern. Related to
the readiness of ports, and critical to us trade, is the Panama Canal.
Has the State Department done any review of the Y2K readiness of the
Panama Canal, including its plans for the century date change?
Answer. OIG has been told that the Department of Defense has the
lead on the Panama Canal.
However, the Panama Canal Commission's web site states ``The Panama
Canal is working on this serious problem at many levels and is
preparing all our internal systems and operations to be fully ready for
the transition to the next millennium. To further reduce risks, we are
contacting our customers to assess how well prepared they are to
operate during critical Y2K periods.'' It further states ``To avoid
potential problems with Canal transits, the Panama Canal is studying
which special operational procedures will have to be implemented on the
Y2K critical dates. Vessels may be required to demonstrate Y2K
compliance in order to transit on those dates.''
Question 4. You have testified about the regions of the world that
are most at risk of Y2K failure. Have you determined whether there will
be a significant economic impact on the United States from Y2K failures
in these regions, or whether any significant impact on the United
States would be humanitarian in nature?
Answer. Any long-term Y2K-related failures will have an economic
impact on the United States. However, the initial impact of any Y2K-
related failures will most likely be humanitarian if there are
widespread breakdowns in the energy sector--especially in Russia and
the former Eastern bloc countries.
Question 5. Please describe your expectation of significant
unresolved Y2K problems, of whatever nature, in Europe, Asia, Latin
America, and Africa.
Answer. There are two major areas in all four regions that remain
unresolved, and are likely to pose some difficulties as a result of the
Y2K computer problem. First, globally the health care arena got off to
a late start and until this year there was little information available
on Y2K compliance of medical devices. That problem has since been
resolved, and there are now numerous web sites that provide Y2K
information on medical devices. In much of the developing world, health
care remains decidedly low-tech and should not be significantly
affected by Y2K.
Another area with unresolved Y2K computer problems includes the
small and medium-sized enterprises (SMEs). Again, small businesses were
generally last to become aware of potential problems, and last to begin
any kind of remediation.
Further, we found that during our visits to countries hard hit by
the recession (Brazil, Korea, etc) that many of these enterprises were
barely surviving financially and thus lacked resources to fix or
replace their systems. The biggest concern about SMEs is the fact that
they play a major role in the world's economy, and as a result, Y2K-
related disruptions have the potential to have a major impact on the
global supply chain.
Question 6. Do you know when the State Department plans to release
country-specific information related to Y2K? When will they issue
advisories related to Y2K, if such advisories will be issued at all.
Answer. On September 14, 1999, the Department issued revised
consular information sheets for 196 countries and territories, which
included country-specific Y2K information.
On October 13, in my statement for the hearing record, I explained
the concerns that we have about the adequacy of the consular
information sheets. Specifically, we felt that some of the consular
information sheets provided vague information on Y2K, or conflicted
with information from other sources. As a result of criticisms made by
my office, GAO, and the press, the Department has asked each post to
submit proposed language for any updates (positive or negative) to the
Y2K consular information sheets. The Department has requested that all
post provide interim status reports, indicating no need for change at
this time, by no later than November 15th, and again on December 15th.
On October 29, 1999, the Department issued Travel Warnings for the
following four countries: Russia, Ukraine, Moldova, and Belarus due to
potential Y2K-related disruptions.
Question 7. Your statements on the likelihood of Y2K failures
across the world are disturbing. I can see how the presence of the
State Department in so many countries facilitates access to information
on the local infrastructure, but I did not hear you say how you reached
the conclusions that you did in your statement. Would you take a few
minutes and describe for the committee what approach you took to reach
your conclusions? How do you distinguish between high, medium, and low
risk, for instance?
Answer. Our conclusions were based on our analysis of information
obtained from a number of sources. We reviewed host country
infrastructure assessments from embassies in 161 countries. In
developing their contingency plans, embassies were required to assess
the relative risk (low, medium, or high) that Y2K-related failures
might occur in key sectors, including among others communications,
energy, and transportation. These assessments were provided to the Y2K
project management officer, where they were entered into a data base.
We compared the embassy assessments with information from the Global
2000 assessment, and from open sources, such as web sites, other
government agency reports, etc. Finally, we incorporated into our
analysis information obtained during our visits to overseas sites. On
those visits, we collected information on Y2K readiness through
discussions with representatives from key sectors, including the host
government, private sector businesses, utility companies, banking, and
associations (such as the American Chamber of Commerce).
Question 8. You very often mentioned concern about
telecommunications in the 161 countries you reported on. As we will
hear later, the International Telecommunications Union (ITU) has a more
optimistic picture of global telecommunications than you do. Can you
explain why your understanding of the telecommunications situation is
more pessimistic than theirs? Is your data on telecommunications from a
different source?
Answer. The reason for the International Telecommunications Union's
optimism is not clear to my office. Our information collected on
telecommunications readiness generally comes from our embassies and
from our direct discussions with telecommunications companies, and
other private sector representatives in those countries. Even in this
country most telecommunications companies remain guardedly optimistic,
and are loathe to declare that they are Y2K compliant--there are just
too many things that can still go wrong, particularly with embedded
chips.
__________
Prepared Statement of Kevin Click
Introduction
Mr. Chairman and members of the Committee, I am Kevin Click,
Director of Corporate Audit and Head of Worldwide Year 2000 Corporate
Compliance Efforts for Philip Morris Companies Inc.
Philip Morris Companies Inc. (PM) is the world's largest
manufacturer and marketer of consumer packaged goods. In 1998, our
major tobacco, food and beer businesses generated $74 billion in
operating revenues. With over 144,000 employees around the world, the
company has staff in virtually every market, who have expertise in
local business practices, cultures and languages. Our portfolio of
premium brands includes 73 brands that each exceeded $100 million in
1998 sales, and 12 that topped $1 billion. The company's extensive
global network of manufacturing facilities and distribution channels
ensures rapid response to shifting consumer demand about the world.
As a truly global organization, worldwide preparations for the year
2000 (Y2K) computer problem are of vital importance to the continued
success of our company. As a corporation, we have committed $550
million to the Y2K compliance and remediation efforts and an additional
$150 million to replace certain systems, hardware, and equipment. We
currently estimate we will spend an additional $85 million executing
preemptive contingency plans. At the height of our remediation efforts,
over 1,200 PM employees and outside contractors were working on Y2K
projects around the world, and have committed approximately 2,500 man-
years of professional time to addressing the issue.
Our senior management fully understands the magnitude and
importance of the problems we face, and has made the successful
resolution of the Y2K issue a business priority. The senior management
team has been actively involved in the oversight process, and receives
regular progress updates from the management of each operating company.
Furthermore, our operating company presidents periodically present
their organization's Y2K project status to PM's Chief Operating
Officer. In addition, the Audit Committee of the Board of Directors is
periodically briefed on the company's Y2K compliance status.
Global Program Overview
The scope of our worldwide Y2K program is enormous. PM subsidiaries
and affiliates conduct business in over 180 different markets. We
operate 220 factories in 50 countries and manage hundreds of office
buildings, warehouses and distribution centers around the world. Our
businesses are supported by thousands of computer applications, tens of
thousands of personal computers, and hundreds of thousands of automated
control devices within our production and distribution facilities.
Given the complexity, scope and importance of the project, we
instituted a cross functional year 2000 program organization in early
1996 to leverage our knowledge and scale and help monitor the progress
of our 120 Y2K project teams deployed throughout the world.
We are pleased to report to the Committee that after several years
of intensive work, we have substantially completed the worldwide
remediation and testing of our internal business applications, factory
controls systems and buildings and facilities. However, as the
Committee is well aware, successfully resolving internal compliance
issues does not guarantee a successful transition through the
millennium crossover. As with most multinational companies, we have
highly interdependent relationships with tens of thousands of business
partners, including customers, vendors and utility providers, and
governmental entities. Many of our critical business partners are
located in countries where the Y2K issue has not received the same
level of attention as in the U.S. Therefore, we continue to focus on
the status of our key business partners and the contingency plans
needed to address possible disruptions in our supply chain.
Global Program Details
Jim Kinney, Senior Vice-President of Information System, Kraft
Foods, Inc., testified before the Committee on March 2, 1999, regarding
the Y2K program at our North American food business. Due to our
centralized coordination efforts, the Kraft project mirrors the efforts
under way at all our major business units. Therefore, I will not
redescribe our Y2K program in detail, and will instead focus
specifically on the concerns raised by the Committee's July 1, 1999
letter to our CEO, Mr. Geoffrey Bible. However, we would like to report
the overall status of PM's Y2K remediation efforts. As of June 1999,
our worldwide portfolio of information systems and factory systems were
over 97% compliant, a result of the hard work and dedication of our
employees around the globe. The remaining work primarily relates to
noncritical systems and should be complete by September 1999. At this
point, we are confident in our ability to manage all internal
compliance issues with few disruptions to our businesses.
Looking forward, our key concerns remain largely outside our direct
control: the Y2K remediation progress, or more precisely the potential
lack thereof, at our more than 70,000 business partners around the
world, particularly in certain international markets. To address these
concerns, in 1997 we launched an initiative involving management at all
levels of our organization, to identify, assess, educate, assist and
monitor our business partners' Y2K remediation progress. Early on, the
more we learned about the Y2K status at some of our critical business
partners, the more concerned we became. Since then, we have witnessed
significant progress in many areas. However, we still believe that some
of our critical partners will not be ready for the millennium change.
WE have therefore developed comprehensive, detailed contingency plans,
both preemptive and reactive, to address possible disruptions in our
supply chain. Finally, we are in the process of developing detailed
transition management plans to guide our businesses through the century
changeover and beyond.
Business Partner Program
The first step in our business partner program was to identify and
prioritize all business partners. This effort required management
participation from all functional areas in every affiliate. Of the
70,000 business partners identified, over 6,000 are considered highly
critical to the success of our business.
To begin to assess the potential risk to our businesses, our
partners were initially contacted via letters or questionnaires;
however, the response to these initial inquiries was less than optimal.
Therefore, we began the second phase of our assessment, focusing on our
more critical partners. This phase involved telephone interviews, and
where appropriate, on-site visits to help ascertain business partner
Y2K status. Many times, we were the first company contacting them
regarding Y2K. In some cases, particularly internationally, this was
the first time they had even heard about Y2K.
Based on our initial assessments and feedback, it was evident we
would need to take action to ensure the continuity of our supply chain.
In most cases, the first step was to educate. For example, in Turkey,
teams consisting of local information systems and sales personnel
called on our 110 distributors throughout the country. The teams
presented Y2K awareness information and helped the distributors test
critical components of their internal systems. We provided each
distributor with additional local language information on how to become
Y2K compliant. This process has been repeated throughout the world,
with awareness pamphlets created in languages ranging from Italian to
Polish.
We have also worked with a variety of organizations around the
globe, providing expert speakers to help raise awareness of the Y2K
issue. From local chamber of commerce meetings in Neucha, Switzerland
to U.S. Commerce Department-sponsored events in Russia and Korea, we
have demonstrated our commitment to helping raise global awareness.
In spite of our best efforts, we currently consider approximately
700 of our more than 6,000 highly critical business partners to be
higher risk, or likely to suffer Y2K related failures. The majority,
approximately 600, are international partners. On a percentage basis,
the numbers may seem low: only 1% of our business partners appear to be
higher risk. Nonetheless, based on our current understanding, we
believe we will suffer some disruptions in our supply chain due to Y2K
failures at our business partners' facilities.
The actual impact of these disruptions is difficult to predict. The
company currently believes that the most reasonably likely worst case
scenario entails some localized Y2K disruptions that may affect
individual facilities or operations for short periods of time rather
than long-term, systemic problems. The possible consequence of these
disruptions include temporary plant closings; delays in the delivery of
products; delays in the receipt of supplies; invoice and collection
delays and errors; and inventory and supply obsolescence. Depending on
the number and severity of Y2K-related disruptions, it is possible that
the business and results of operations of the company could be
materially adversely affected. We will therefore continue to monitor
the Y2K status of our business partners well into the year 2000.
Contingency Plans
If we expect disruptions in our supply-chain, we clearly need to be
prepared. Therefore, the business partner assessment initiative
described previously becomes a driver for our contingency planning
process. Each operating company and affiliate has reviewed their
business and supply chain model and the production and sales plans for
the first quarter of the year 2000. Detailed contingency plans have
been defined based on the assessed risk of each component in the supply
chain, with the following major objectives:
1. Maintain employee safety;
2. Maintain the safety and quality of our products;
3. Prevent disruptions of our employee payroll and benefit
programs;
4. Preserve our customer service;
5. Safeguard our physical assets; and
6. Manage overall contingency costs in association with
remediation spending.
One of the most basic contingencies involves stockpiling additional
levels of raw materials and finished goods. For example, in Europe we
are increasing our inventory of coffee and cocoa beans by an additional
three weeks. In our Asian tobacco businesses, we will be adding one
month of incremental finished goods safety stock throughout the region.
In some cases, we are moving additional finished products through the
supply chain, staging inventory as close to the final consumer as
possible. In other instances, documented work-around procedures have
been developed. For example, in many Latin American countries we have
agreed to deliver standard weekly orders to customers in the event the
order-taking process breaks down.
Our North American businesses are not heavily reliant on foreign
suppliers. However, one major exposure is imported coffee beans. To
address this issue, Kraft Foods plans to hold an additional two to four
weeks supply of coffee beans on shore in the fourth quarter of this
year.
Interruptions in utility services are also a concern. In January,
pipes in some of our Northern Hemisphere plants would begin freezing
within hours of losing power. We have therefore contracted back-up
power generators, where necessary, to ensure the continuity of basic
infrastructure and safety and security systems. In addition, in certain
countries we have secured satellite phones to ensure basic
communications are possible. Of course, extended outages of basic
utility services would be extremely disruptive, not only to businesses,
but to the communities where we live and work as well.
In spite of our best planning, we will undoubtedly face unforeseen
obstacles. Fortunately, PM, like many other multinational corporations
operating throughout the world, has considerable experience in dealing
with unplanned business interruptions. Regrettably, economic crises,
banking system meltdowns, utility failures, supply-chain interruptions
and social unrest are not uncommon occurrences in many parts of the
world. Our seasoned executives are experienced in dealing with
adversity. In the event of unforeseen disruptions, we believe our
management team will be able to react quickly to minimize the adverse
impact on our businesses.
The comfort provided by these contingency measures has a price. The
incremental costs of the preemptive measures currently planned are
estimated at $85 million. This estimate is subject to change based on
developments in our business partner assessment and monitoring program.
Also, year-end increases in inventories and trade receivables will
result in incremental cash outflows of approximately $600 million,
which will be reversed in early 2000.
Transition Management
We are currently preparing for the final phase of our Y2K program:
transition management. Transition management governs the recovery from
errors and interruptions that may occur shortly before and after the
transition to the year 2000.
PM already has many procedures in place to handle business
disruptions of all types. However, we recognize that the year 2000
transition period is unique in the potential volume and concentration
of problems occurring during a relatively short time period, and the
potential effect on locations worldwide, rather than a single
installation. Transition management focuses on handling this expected
short-lived increase in problems, supplementing rather than replacing
existing practices.
Our transition phase will occur between October 1, 1999, and March
31, 2000. We expect an increase in support requirements and supply-
chain interruptions affecting the flow of goods and services, although
no one can predict with certainty how and when problems will occur. In
our opinion, spectacular problems are apt to be rare. More likely, we
will see a host of small problems that are individually surmountable,
but whose cumulative effect could be disruptive.
Our transition management organizations exist at multiple levels.
Each of these organizations has five principle functional areas: a
transition response center; help desk operations; event response teams;
legal support; and a Special Situations group. This command and control
structure is designed to capture, direct and track responses to all
problems through to resolution. Many functions already in place for
other purposes within the operating companies and their sub-
organizations form the foundation of the year 2000 transition
management team.
Preparing business operations for the transition period is a
complicated undertaking that depends greatly on the characteristics of
the particular business area. Some general preparatory actions include
freezing production changes, shifting or deferring activities,
adjusting plant holiday shutdowns and vacation schedules, and creating
back-ups and contact lists. In each situation, executives are aware
they must balance the risk and potential impact of year 2000 issues
against business opportunities.
Transition management teams are also preparing employees for the
anticipated impact of the year 2000 on their jobs. Employees must
assume responsibility for monitoring the software, hardware, equipment
and third parties that are integral to their job functions since they
are in the best position to recognize behavioral anomalies and problems
with quality or performance. Employees who may receive telephone calls
and queries about year 2000 issues or PM's' performance during the
transition period must know how to handle those queries to ensure a
proper and consistent response. All employees will need preparation to
overcome and defuse millennium hype so they have a realistic sense of
what could go wrong and what to look for during the transition period.
Another important aspect of transition planning is communication.
We are developing communication plans for the transition period
covering both the method in which communications will be conveyed
(radio, cell phone, fax etc.) and the content of the communication.
To ensure that our transition management plan is feasible and all
components work smoothly when the transition period arrives, we have
scheduled a rehearsal for September 1999 across all operating
companies.
Project Management and Progress Monitoring
At PM, the primary responsibility for planning, prioritizing,
funding and executing the year 2000 program rests with our operating
companies. Mr. Kenney's March 2 testimony provided an excellent example
of the type of efforts we have under way in all our operating
companies. However, in recognition of the global and interdependent
nature of the year 2000 issue, in March 1996 we established a cross-
functional year 2000 program organization to oversee and coordinate our
Y2K programs worldwide. This organization is also responsible for
complying with external disclosure requirements.
To monitor the progress of our program on a company-wide basis, we
implemented a quarterly reporting process for all our 120 project
organizations around the world. For our 35 largest businesses, we track
progress monthly. This monitoring is in addition to weekly and monthly
progress reporting at the local project and operating company level. In
addition, our Corporate Audit Department began performing independent
assessments of Y2K readiness in 1996. The auditors coordinated two
worldwide Y2K self-assessments for all affiliates and have performed
independent Y2K reviews at all major affiliates. Also, Y2K status is
now reviewed during all Corporate Audits, with over 200 performed last
year. In 1998, we engaged PricewaterhouseCoopers (PWC), our external
auditors, to provide an independent review our Y2K efforts. Since then,
PWC has supplemented our own Corporate Audit group in auditing
compliance progress.
More recently, we implemented a Y2K ``health check'' program to
supplement the existing monitoring, reporting and auditing program.
This initiative provides an additional measure of affiliate progress,
particularly for our smaller to mid sized affiliates, which may not
have received the same level of attention as the larger units. Teams of
independent, senior level Y2K experts from throughout the company spend
one or two days at the affiliate under review, providing on-the-spot
recommendations and helping identify affiliates that may benefit from
additional resources.
Our progress monitoring system has been critical to the success of
our overall Y2K program. It has enabled us to ensure sufficient
resources are allocated to this program and to identify and resolve
issues in a timely manner.
Conclusion
As we enter the final phase of our Y2K preparations, we are
confident in the measures we have taken to address our internal systems
and processes. However, we remain concerned about the level of our
business partners' preparations, and believe we will suffer some
interruptions in our supply chain, primarily in our international
markets. The actual impact of these disruptions is difficult to
predict. The company currently believes that the most reasonably likely
worst case scenario entails some localized Y2K disruptions that may
affect individual facilities or operations for short periods of time
rather than long-term, systemic problems. The possible consequences
include temporary plant closings, delays in the delivery of products,
delays in the receipt of supplies, invoice and collection delays and
errors, and inventory and supply obsolescence. Depending on the number
and severity of Y2K-related disruptions, it is possible that the
business and results of operations of the company could be materially
adversely affected. However, we believe our internal preparations, and
the contingency measures and transition management approach outlined
previously should reduce the risk and potential disruptions to our
businesses.
That concludes my testimony, and I would be happy to answer any
questions you may have.
* * * * *
Philip Morris Companies Inc. is a holding company whose principle
wholly-owned subsidiaries are Philip Morris Incorporated (Philip Morris
U.S.A.), Philip Morris International Inc., Kraft Foods, Inc.
(comprising Kraft Foods North America and Kraft Foods International),
Miller Brewing Company, and Philip Morris Capital Corporation. ``PM'',
``we'', ``us'' and ``our'' refer, as appropriate in the context, to
Philip Morris Companies Inc. or one or more of its subsidiaries.
__________
Responses of Kevin D. Click to Questions Submitted by
Chairman Bennett
Question 1. In your written testimony, you state that you currently
consider approximately 700 or more of your more than 6,000 highly
critical business partners to be higher risk, or likely to suffer Y2K
related failures, and that about 600 of these are international
partners. Are these business partners widely dispersed throughout the
world, or do they fall in any particular regional patterns?
Answer. Since our testimony to the Committee in July, we have
continued to work with and monitor our business partners, and many of
our critical partners have made good progress in addressing the Y2K
issue. As of September 1999, we consider approximately 250 critical
partners to be of higher risk. While these higher risk partners are
spread throughout the world, we see three primary categories of risk:
Large suppliers and customers in developing countries
(e.g. parts of Central and South America, parts of Southeast Asia, and
parts of the former Soviet Union)
Medium to large suppliers and customers in more developed
countries (e.g. more developed Asian countries, parts of Europe)
Certain governmental entities and infrastructure
providers in Asia, Latin America, parts of Europe, and Russia (e.g.
utilities, customs clearance agencies, ports, government tobacco
monopolies, etc.)
Question 2. In cases where critical international business partners
are at risk from Y2K failures due to their own internal processes, is
Philip Morris considering terminating business relationships in favor
of business partners with less Y2K risk?
Answer. First, we have already begun to diversify our supplier base
so that we have qualified alternatives in place should a given partner
suffer disruptions. Therefore, we would, and in fact have already,
changed some business partner relationships due to concerns over Y2K
preparations.
Second, changing major suppliers or distributors is a costly and
disruptive process. In many cases, we have long standing relationships
with these partners, and we would prefer to maintain these
relationships. Therefore, we have continued working with our business
partners to help ensure they understand what they need to do to become
compliant.
Finally, there are certain business partners for which there are no
alternatives, such as the U.S. Customs service. If there are Y2K
problems at these partners, we will simply have to work through any
resulting disruptions.
Question 3. You testify that your firm is initiating some limited
stockpiling of additional levels of raw materials and finished goods.
Are you taking these steps due to concerns about the Y2K status of
certain business partners or due to concerns about such things as
transportation or other infrastructure?
Answer. Many of the business partners we consider to be of higher
risk are transportation and infrastructure. Therefore, when evaluating
a given supply chain, either upstream or downstream, we consider the
risk of the weakest link in the entire chain. For example, our upstream
supply chain might include overseas suppliers, ports and customs
agencies at both ends, and all transportation companies used in-
between. Stockpiling additional raw materials and finished goods is one
of the most expedient methods for addressing failures or interruptions
along any point of the chain.
Question 4. Your testimony indicates that Philip Morris has
identified almost $800 million in direct expenses and another $600
million in stockpiling as the cost of Y2K preparedness. Will you please
give the Committee some examples of the kind of Y2K business partner
failures that you fear? Are you concerned that corporate stockpiling
will create shortages of key items? Is there any industry effort to
coordinate corporate contingency plans, which might include stockpile
issues to reduce the possibility of creating a problem?
Answer. Potential business partner disruptions can be categorized
into three primary groups. The first would be risks in our upstream
supply chain, including disruptions at suppliers, transportation
companies, ports and customs services. The second would be breakdowns
that impact our internal ability to produce products, such as
disruptions in utility services. The third would be risks to our
downstream distribution systems, including our distributors, wholesales
and/or retailers, and again including transportation companies, ports
and customs agencies. Our current assessment of higher risk partners
includes entities along all points of our supply chain.
Businesses around the world have become more efficient, resulting
in reduced excess manufacturing capacity available to address short-
term surges in demand. We have therefore been working with our business
partners for some time to coordinate inventory needs, production
schedules and delivery dates. We believe this will help reduce the
possibility of shortages due to stockpiling. However, we are unaware of
any industry-wide efforts to coordinate corporate contingency plans.
Question 5. Would you please discuss some of the Y2K problems that
you expect after January 1, 2000, and how they could affect your
business?
Answer. The first, most immediate risk we see is with external
infrastructure failures, such as interruptions to utility services. If
these types of failures occur, they are most likely to occur during the
century roll over. Our contingency plans address these issues, and are
designed to help ensure employee safety and to protect our assets.
These types of failures could necessitate facility closures, and could
result in temporary production outages.
A second risk we see is with systems that continue to process, but
provide incorrect data. If a system stops processing, the problem
becomes obvious and resources can be dispatched to fix it. Processing
errors that do not stop the system might not be obvious at first. For
example, a first-in, first-out (FIFO) inventory system in a warehouse
may incorrectly assume products produced in the year 2000 were produced
in the year 1990. The system, on a first in, first out basis, might
therefore ship the newest product first. The older product, produced in
1999, might never be shipped, and could become obsolete.
We have implemented awareness programs to help employees understand
the types of issues they could face, and are encouraging them to be
particularly diligent in the initial days and weeks following the
transition. In the end, we believe that Y2K problems could entail some
localized disruptions that may affect individual facilities or
operations for short periods of time rather than long-term, systemic
problems.
Question 6. Transition management, recovery from Y2K errors and
interruptions, makes sense as a concept. Have you actually conducted
and model exercises in failures like power or telecommunication systems
and, if so, what did you learn?
Answer. Actually, we have several real life experiences to draw on
which have supplemented the simulations we are conducting. For example,
the recent severe ice storms in the Northeast provided several valuable
learnings. The analysis of these real life case studies, in conjunction
with our contingency and transition management rehearsal program, has
helped identify several best practices:
First, it is important to have clear plans in place, including a
defined chain of command for decision making. Second, it is important
to ensure that the appropriate supplies and materials are on hand in
the event they are needed. For example, printed lists of contact phone
numbers, fuel for back-up generators and spare batteries for
flashlights should be kept on hand, and periodically checked for
freshness. Finally, everything improves with practice. Like a fire
drill, it is important to periodically rehearse the plan to ensure
everyone knows his or her responsibilities, and reconfirm that the plan
is still valid.
Question 7. The Transition Management rehearsal you are planning in
September across all operating companies sounds very practical. Could
you give the Committee some insight into how this will be accomplished
and what you expect to learn?
Answer. The transition management rehearsal, which we held in
September, had two major objectives:
First, we rehearsed the roles and responsibilities of the first
level transition management teams. Teams were given a Y2K scenario to
respond to. This tested our ability to react, highlighted gaps in
existing contingency plans, helped clarify roles and responsibilities,
and helped confirm that our response teams have the appropriate tolls
to address the problems.
Second, we rehearsed our chain of command reporting process. Our
senior management will be very interested in any issues that may arise
as we crossover into 2000. We have implemented a reporting mechanism
that will provide an overview of the company's status, allowing
management to allocate resources to the highest priority problem areas.
Overall, the rehearsal program has been very successful, and has
served as a valuable learning exercise.
Question 8. Global companies equate to global economies making Y2K
a global economic as well as global technical problem. Do you have
suggestions as to how the United States can help other countries in the
remaining five months before the Year 2000 and thereby limit the
economic impact on ourselves?
Answer. First, we would like to applaud the efforts of this
Committee in raising awareness and keeping pressure on industry and the
federal government to address the Y2K issue. This type of leadership is
invaluable.
Second, we encourage the Committee to support additional efforts by
the State Department, Commerce Department and others in continuing to
raise Y2K awareness overseas, particularly with governmental entities
and utility providers. The efforts to-date along this line have been
very helpful in encouraging our international business partners to
address their Y2K issues.
Finally, as we enter the final weeks of preparation, we believe
these international organizations should be encouraged to focus on
contingency and transition management plans to help reduce the impact
of any interruptions that do occur. In addition, the U.S. government
may want to consider the type of assistance or support that could be
provided in the event other countries suffer serious infrastructure
failures.
__________
Prepared Statement of Vice Chairman Christopher J. Dodd
Thank you, Mr. Chairman. This is the second time we have held a
hearing on international Y2K issues. In an earlier hearing, we also
reviewed the ramifications of Y2K in international shipping and the
international export of oil. Today, we will focus on global
corporations that have achieved market presence in multiple nations.
Global, internationally recognized businesses are generally the
most healthy, most prosperous, farthest-reaching businesses. They are
survivors. They understand what is required to maintain a strong
position in the global economy and they thrive by remaining
competitive.
However, global companies, which posses the requisite capital
hardware, real estate, and cash to expand into and maintain a market
presence within multiple nations, also have a greater responsibility
because of the numbers of people they affect. There is significant
potential for cascading failures in global corporations which have
interdependent parts that span multiple borders. Imagine a multi-
billion-dollar holding company that manages the supervisory operations
of multiple business entities around the world. Think of the
ramifications if a business like this falls victim to an internal
problem which, from the top down, creates a spiraling deluge of
secondary problems. The cumulative effect could be overwhelming and
that is precisely why we decided to hold this hearing. We are
interested in learning where Y2K problems may be manifested, and to
what extent these corporations have inoculated themselves against
potential Y2K malfunctions.
Mr. Chairman, these corporations are among the world's biggest
economic institutions. A rough estimate suggests that the 300 largest
global corporations own or control at least one-quarter of the entire
world's productive assets. Though based predominantly in Western
Europe, North America, and Japan, global corporations span the globe
and account for sales revenues that are comparable to or greater than
the GDP of most countries. Last year revenues derived from goods and
services sold outside the U.S. by the 100 top multinationals increased
5%, to $958 billion, while overall revenues totaled $2.5 trillion.
Today few, if any, countries are economically self-sufficient.
Everyone is shipping parts to everyone else. Microprocessors built in
Arizona or California are shipped to Hong Kong for installation in a
computer system that manages point of purchase operations in a
manufacturing company in Buenos Aires. The ever-decreasing cost of
communications, combined with the ease of transportation, has
encouraged global corporations to conduct business with organizations
in other countries as easily as one farmer traded his produce for goods
in town at the beginning of this century.
Each of the largest global corporations utilizes thousands of
critical suppliers, many of whom are located internationally. As a
result, a global corporation must ascertain the Y2K-compliant status of
each of its critical suppliers to ensure that day-to-day operations are
maintained. This can be a daunting task. The interconnectivity of any
business that utilizes computer systems, whether internally or via the
many relationships that are maintained among business entities, is
where the real risk lies. Interdependencies exist on so many levels
that it is impossible to tell where or when problems in one area could
surface in another. Global corporations, because of the international
relationships they must maintain, are expressly threatened by a date-
related computer malfunction. The very nature of these organizations
with the myriad interdependencies among suppliers, shipping
organizations, ports, financial institutions, and manufacturers, leaves
them particularly vulnerable relative to smaller enterprises which
maintain few business relationships.
In addition, the international trading system, with its complex web
of distributors, customers, and transportation links, is supported by a
critical infrastructure of products and services. The most important
components of the infrastructure are energy production and distribution
facilities, transportation modes, communications channels, and banking
institutions. These sectors are highly computerized and interdependent
and are particularly sensitive to dates for the smooth exchange of
goods and services. These characteristics render them especially
susceptible to Y2K-related problems. Breakdowns in any part of the
trade support structure could slow or halt shipments of key components
needed to keep factories working, hospitals functioning, food in
continuous supply, and people employed.
We look forward to hearing from our witnesses today. I am
especially pleased to welcome Mr. Charles Krichbaum from my home State
of Connecticut. Mr. Krichbaum is the Director of the Year 2000 Project
for Praxair Incorporated located in Danbury, Connecticut, which is the
largest producer of industrial gases and maintains a market presence in
more than 40 countries. I am looking forward to his testimony. Thank
you Mr. Chairman.
__________
Prepared Statement of Kevin Haukebo
Mr. Chairman, Members of the Committee, I thank you for this
opportunity to speak to you about steps Procter & Gamble is taking to
prepare for the Year 2000. Specifically, you asked that I address the
impact of Y2K on our global supply chain and our ability to maintain
our day-to-day operations abroad given the status of critical
infrastructures in those countries where we operate.
As background, we began preparing for Y2K more than three years
ago, and I have managed our central project office since the beginning.
Our goal is to minimize the risk of potential disruptions to our
business operations and to make sure the brands our consumers know and
trust are there for them when needed. This has entailed two major areas
of work: a reliability review of our internal systems and an analysis
of our external business partners.
Internal Systems
Our initial project efforts focused on identifying and correcting
critical information and embedded system technologies. This included
financial, human resource, order, shipping and billing information
systems as well as systems and technologies used by our manufacturing,
building maintenance, safety, environmental quality, quality assurance
and research and development organizations. We inventoried and
prioritized these systems and technologies based on how critical they
are to our business. Specifically, our:
Research & Development organization has verified over
3,000 pieces of laboratory equipment and systems;
Facilities Services group has checked over 10,000 systems
in nearly 300 locations;
Information Technology organization has completed work on
over 7,000 applications and nearly 200,000 pieces of technical
infrastructure; and
Product Supply organization has finished work on over
100,000 internal components at nearly 150 sites and analyzed over
10,000 suppliers. This in-depth knowledge of our internal readiness was
instrumental in formulating and executing our approach with external
partners.
External Partners
We have undergone considerable efforts to contact our external
business partners, including suppliers, customers and service providers
to ensure that current business operations are maintained through the
millennium transition. We initiated this process to build our
confidence level in the ability of our external partners to ensure the
ongoing health of their business, which includes taking the appropriate
steps to avoid Y2K disruptions. We have approached this mutual
challenge in a way that builds upon our business relationship. Our
objective is to manage risks related to Y2K with our external partners,
while maintaining the integrity of our supply chain so that our
consumers have access to our products.
Our current best approach for assessing external partner readiness
includes a four-step process:
1. Develop an inventory of our external partners;
2. Understand the business criticality to Procter & Gamble and the
risk of disruption or failure of each external partner;
3. Assess our key external partners to determine their Y2K
readiness; and
4. Develop appropriate action plans based on the outcome of the
third step.
To initiate this process, we sent a letter to our external partners
requesting supply assurance throughout the Y2K transition period. We
also inserted language into contracts with suppliers stipulating their
ability to deliver our needs throughout the period. This first step
helped underscore the priority Procter & Gamble has placed on
minimizing the impact of Y2K on our supply chain.
Second, we weighed the magnitude of the impact external business
partners could have on Procter & Gamble based on the importance of the
service or product they provide and the likelihood they would
experience a disruption or failure. We also referred to the Gartner
Group country-by-country data in evaluating risk, and our on-site
visits confirmed the Gartner findings that we understand were
previously shared with this committee. Clearly, there is no simple,
automatic formula for determining business criticality and risk. In the
end, a value judgment has to be made by those working closest to the
external partner. We use common factors to guide our thinking. Our
Business Criticality/Risk Assessment Grid helps us assign High (Red),
Moderate (Yellow), Low (Green) ratings to our partners. External
Partners who represent the least risk fall into the green shaded area,
and partners with the greatest risk fall into the red areas. Red, of
course, is where we focus most of our effort (see Figure 1).
Next, we assessed external partner readiness with varying degrees
of follow-up based on where the partner fits in our grid. We conducted
face-to-face meetings with critical suppliers worldwide. These meetings
were held at our suppliers' facilities with people from their
organizations that are knowledgeable about Y2K. If our purchasing
manager who conducted the meeting needed additional support or was
unsatisfied with the meeting, he or she would take one of our Y2K
experts from Information Technology or Manufacturing to the next
meeting with the supplier. If we were still not satisfied, we would put
``work around'' plans in place. These could consist of buffer
inventory, alternate suppliers or a change in product or package
formulation. We used this four-step process with over 4,400 centrally
managed, critical suppliers worldwide and more than 6,600 suppliers,
vendors and agencies that are important at the local site level.
Based on our work to date, we are not expecting any major
disruptions to our supply chain. We either have confidence in or ``work
around'' plans that are ready to be executed with more than 99 percent
of our key central suppliers worldwide.
Business Continuity Planning
We realize there will be outages beyond our control and the impact
of Y2K will vary country by country. We have developed business
continuity plans, which assume something will go wrong. The objective
here is to protect our critical business processes from disruption or
failure before, during and after the Year 2000. These business
processes are: make, pack, sell and ship our products; maintain cash
flow; maintain communications; and ensure our site utilities are
operational.
Every function and every region within the company was included in
creating the overall business continuity plan, as there are a variety
of situations to address, and as risks differ by business and by
country. Our plan assesses internal and external risk factors to
prepare each site in the event of business disruptions and/or failures.
We have examined nine risk areas globally and have developed
contingency plans to address:
1. Inventories and Customer Demand
2. Impact on New Initiatives and Promotions
3. External Partner Readiness
4. Utilities/Infrastructure
5. Cash on Hand/Payroll Policy
6. Fraud Awareness
7. Credit Policies
8. Contingency and Staffing Plans
9. Year 2000 Communication Center
Specifically, you asked for our perspective as a multi-national
company on the status of the infrastructure for critical utilities
abroad. Our initial assessment was structured around the Gartner Group
Report on risks, by country, of Y2K-related infrastructure failures.
Our work continues to be supported by the Gartner Group assessments and
industry progress reports. Based on this industry data, our global
utility planning team investigated utility service providers worldwide
to determine the risk of a utility interruption and developed a
standard approach to begin contingency and business continuity planning
on a regional basis (see Figure 2). Local P&G country contacts have
contacted utility providers in each of their locations to understand
the work they have done to prepare for Y2K and to determine if their
service would be uninterrupted during this time frame. We solicited
information using an in-depth questionnaire, personal phone calls and
face-to-face interviews where possible to confirm information. In
recent months, we're seeing more information flow from utility
providers in various countries where we operate. However, utility
providers in countries identified ``at-risk'' by the Gartner Group have
been reluctant to respond to our inquiries.
We have also completed utility risk assessments at each of our
manufacturing, office and data center sites worldwide. This includes
completing internal remediation and staffing plans for critical
periods. In addition, we have developed contingency plans to deal with
potential gas, electric, water, telecommunications and sewer outages.
Also, we have examined the impact of Y2K on telecommunications. We
have assessed the risk of voice and data disruption where we do
business due to the Y2K transition. In general, we consider parts of
Eastern Europe, Asia, Latin America and the Middle East to be of medium
to high risk. We have tested various telecommunications options such as
satellite phones for high risk sites and other satellite alternatives
for data transmission.
We are concerned by regulatory and licensing issues in Asia and
Latin America, where some countries limit the use of certain equipment.
INMARSAT satellite and VSAT may not be available for use in all
countries. We are selecting contingency options based on the
information we have available on these countries.
We have been working with the International Y2K Alliance to deal
with telecommunications and regulatory issues. Procter & Gamble is a
member of this committee along with other multi-national corporations
such as American Express, Ford Motor Company, IBM and Chase Manhattan.
The Y2K Alliance has been working these industry issues with the U.S.
Department of State. In recent works, the State Department has
organized meetings with the embassies of specific countries between
local public telephone companies and Y2K Alliance. We appreciate the
support of the State Department in helping us address these issues and
believe these meetings are a positive step in the right direction.
Moving Forward
Moving forward, we plan to maintain our Y2K readiness between now
and January 1, 2000, by assessing all new hardware, software and
suppliers. We are also continuing Y2K testing with customers as they
move to the Y2K standard EDI (Electronic Data Interchange)
transactions. Work also continues on our Business Continuity Plan
(BCP), which is being managed geographically. Regional BCP teams have
created transition plans and have deployed our current best approaches
to local markets and organizations. These local resources are also
developing contingency and staffing plans.
In summary, we are working hard to ensure the brands our consumers
know and trust are there when they need them. While we do not expect
any major disruptions to our business, we are preparing contingency
plans to address outages beyond our control. We believe the
preparedness of Procter & Gamble and our people will help us meet the
Y2K challenge.
__________
Responses of Kevin Haukebo to Questions Submitted by
Chairman Bennett
Question 1. You testify that you sent a letter to your external
partners requesting supply assurance throughout the Y2K transition
period. Did this letter take the form of a survey or some other form?
What kind of response did you receive? What types of follow-up have you
done for those suppliers most critical to Procter & Gamble?
Answer. We have undergone considerable efforts to maintain the
integrity of our supply chain so that our consumers have access to our
products. It may be helpful to briefly outline the process we followed
with our critical suppliers. We:
sent letters to suppliers asking if they were prepared
for Y2K and whether they were able to assure supply during the Y2K
period;
inserted language into our contacts with suppliers
warranting their ability to continue to supply Procter & Gamble during
this period;
Gamble during this period;
conducted face-to-face meetings with suppliers to discuss
their preparations in depth; and
included P&G technical Y2K experts in subsequent face-to-
face discussions where needed.
In cases where we were not satisfied, we created ``work
around'' plans to mitigate potential outages.
The letters we sent to our suppliers did not take the form of a
survey. We asked for assurance that they would be OK. We received
varying responses, but most of our suppliers assured us that they would
be all right. In addition, we asked our suppliers specific questions in
face-to-face meetings to penetrate the quality of their response and to
help them prepare where necessary. In specific cases, P&G Manufacturing
or Information Technology technical experts participated to ensure a
thorough understanding supplier plans.
This process continued until we were confident in the supplier's
readiness, or we had put a ``work around'' plan in place. These plans
could consist of buffer inventory, alternate suppliers or a change in
product or package formulation. Additionally, we conducted ongoing
discussions with suppliers concerning any updates or changes on their
Y2K status/progress as part of our normal business discussions.
Question 2 and 3. You testify that utility providers in countries
identified ``at-risk'' by the Gartner Group have been reluctant to
respond to your inquiries. How do you intend to obtain more
information? If unable to get satisfactory responses/information, what
types of contingency plans/continuity of operations plans will you
consider? What are your contingency plans to deal with potential gas,
electric, water, telecommunications and sewer outages in various at-
risk countries where Procter & Gamble does business?
Answer. We have continued to work with country and local utility
providers through face-to-face meetings to better understand their
readiness plans and ability to provide service. We have also received
some help from utility consortiums and regulatory groups in gaining
information. In some countries where suppliers, such as utility
providers, have been somewhat reluctant to provide information, we have
remained tenacious at asking for that information. In many cases this
has provided us with responses. Another technique we have used is to
take a look at similar utilities in other regions where we did get
responses. This benchmarking can give us some indication of the
likelihood of problems at a non-responding supplier's operation.
Contingency plans depend greatly on the potential risk. When we
believe the outage will be very temporary, we have EAP's (Emergency
Alternate Procedures) in place to deal with these minor outages. This
could include giving priority to the most important parts of our
operation in cases of power or utility reduction versus total loss or
shifting production to another facility. In a minority of cases, we
have gone so far as to rely on generators to run parts of the
operation. Steps like increasing our stocks of finished product and
pre-loading customers with finished product have also been used.
Our telecommunications contingency plans are based on a combination
of criticality and risk assessment at the global, regional, and site
level. Comprehensive remediation work for over two years on the
infrastructure has made it Y2K compliant. The major risk factors for
telecommunications are the external components of carriers and the
power sector.
The majority of the high priority data links in the infrastructure
already have built in back-up methods, such as redundancy and diverse
paths. Additional voice and data contingency plans are being
implemented in critical areas where there is a potential risk for Y2K
disruption and no existing back up methods. Satellite phones (Inmarsat
terminals) are being utilized for voice contingency. These will be
implemented in the Y2K Command Centers, along with most high priority
sites. There are various contingencies being utilized for data back-up.
These include introducing diverse carriers and methods, such as ISDN
back-up or remote LAN access. Satellite data links via either V-SAT or
the Inmarsat-B terminals are being implemented in certain high risk,
high priority sites.
Question 4. The Committee has thought that a result of analyzing
suppliers and business partners would result in a ``flight to
quality''. You testified that Procter & Gamble has assessed over 10,000
critical suppliers and partners using a four-step process. What types
of actions are being taken to consolidate, reduce, or find alternate
suppliers for those that are high-risk and high-criticality?
Answer. The types of actions we are taking to assure supply when we
are not confident are building additional inventory to minimize the
impact of supplier outages, developing alternate suppliers and moving
more volume to already existing suppliers. Work around plans refer to
inventory and supplier adjustments.
Question 5. After assessing more than 99% of your over 10,000
critical suppliers worldwide, Procter & Gamble is not expecting any
major disruptions to its supply chain. Would you please briefly give an
example of the type of ``work around'' you referred to in your
statement that is ready to be executed? Would you describe any
disruptions that are expected which don't cross the threshold of major
disruption but may have a noticeable impact?
Answer. Anticipated disruptions that we do not consider to be major
would be a malfunctioning employee badge reader that causes us to
manually check employee identification when they enter P&G facilities
or having to switch from a core supplier for a material that's widely
available from other sources.
__________
Prepared Statement of Charles Krichbaum
Chairman Bennett, vice chairman Dodd and members of the committee:
My name is Charlie Krichbaum, and I am Director, Year 2000 Global
Project Office for Praxair. Praxair is the largest industrial gases
company in North and South America, and one of the largest worldwide,
with 1998 sales of $4.8 billion. The company produces, sells and
distributes atmospheric and process gases, and high-performance surface
coatings. Praxair products, services and technology bring productivity
and environmental benefits to a wide variety of industries, including
aerospace, food and beverage, healthcare, electronics, steel, chemicals
and refining, metal fabrication, water treatment, glass and others.
Thank you for inviting me to speak on behalf of Praxair, Inc.
The goal of Praxair's year 2000 project is to prepare our plants
and systems so that our customers, employees, and the communities in
which we operate are not affected, and business operations around the
world continue to run smoothly and safely through January 1, 2000 and
beyond.
To provide a sense of our global operations Praxair operates in 43
countries, with 43% of our sales from outside North America.
While many international businesses rely on imported goods and
services, this is not a significant issue for Praxair. We produce our
products locally in the countries where we operate. Therefore,
maintaining our day-to-day operations around the world, including
minimizing any impact from critical infrastructure failures abroad, is
an integral part of our overall planning process for year 2000
readiness.
Readiness
At Praxair, year 2000 readiness means that neither performance nor
functionality is affected by dates before, during or after 2000. In
particular:
No value for current date will cause interruption
in operations;
Date-based functionality must behave consistently
for dates before, during and after 2000;
In all interfaces and data storage, the century in
any date must be specified either explicitly or by unambiguous
algorithms or inferencing rules;
2000 must be recognized as a leap year.
Year 2000 Global Project Office
Praxair began working on year 2000 issues in 1996 and formed a Year
2000 Global Project Office in early 1998 to accelerate our progress.
The structure of Praxair's Year 2000 Global Project Office reflects the
broad-based impact this issue has on Praxair's business. The Project
Office reports directly to Praxair's CEO, Bill Lichtenberger, and
coordinates a matrix of global teams, representing both business units
and functional areas to ensure effective management of resources. The
leadership of the Project Officer and the strength of combining
business teams with functional and business units speeds our progress
and optimizes our efforts.
The Global Project Office consists of a project manager and 13
global functional team leaders representing: applications technology;
communications; finance; energy/other utilities; facilities; human
resources; information technology; operations/production; procurement;
product sales and services equipment; law; research and development;
and safety and environmental services. In addition, the Global Project
Office includes team members representing eight Praxair businesses and
affiliates in North America, South America, Europe and Asia who have
accountability for year 2000 activities.
Readiness Process
Praxair's year 2000 readiness effort is organized into several
stages:
Promote awareness of the year 2000 issue among
employees;
Inventory and Assess the impact of the year 2000
issue on Praxair systems and equipment, set priorities for
renovation and develop plans worldwide for year 2000 readiness;
Renovate Praxair's safety and mission critical
systems; We are taking a global approach to renovations and
developing standardized solutions for systems around the world.
This approach ensures that high quality, consistent, and cost
effective solutions are identified on a global basis.
Verify that renovated systems are year 2000 ready
through testing;
Implement tested renovations; and
Develop business continuity and contingency plans
in the event of interruption of Praxair systems.
Since the formation of the Year 2000 Global Project Office in March
1998 here's an indication of what the 1,500 Praxair employees involved
around the world have accomplished in 460 days:
50,000 items assessed
17,000 renovations made
6,000 customer inquiry responses
4,300 suppliers assessed
900 utilities assessed
Suppliers
Praxair, like other companies, may be affected by the year 2000
problems of its suppliers by the interruption of supply of critical raw
materials or utilities. The nature of our business is such that the
most critical suppliers for Praxair around the world are those that
supply electric power, natural gas, and water. To minimize disruption
to these services and to other critical suppliers, we have taken a
number of important steps:
Suppliers of critical equipment, systems and
services around the world, including suppliers of energy
sources such as electricity and natural gas, have been
identified and surveyed for their year 2000 readiness. Results
of the surveys provide important input for our readiness
planning process.
By working with our suppliers, we have been able to
jointly identify and resolve many potential year 2000 problems.
We have implemented policies and strategies that
require items that we purchase to be year 2000 compliant.
We have also taken steps to ensure that documents
like contracts, purchase orders, requests for quotes, etc.
contain our year 2000 compliance language.
We are refining plans as to how to best contact
suppliers over the millennium transition weekend, should any
year 2000 failures occur.
Our communication with our suppliers is ongoing to monitor their
readiness status to ensure we are aware of any changes that may occur.
To date, we have assessed and are in communication with approximately
900 utilities and 4,300 other suppliers worldwide.
Customers
As a supplier to our customers, we may be also be faced with
failures resulting from year 2000 problems experienced by our customers
in the form of interrupted or reduced demand for Praxair's products due
to interruptions in the customer's own manufacturing processes. We are
identifying critical customers for readiness assessment, and are asking
questions similar to the following:
Will customers be ready to use our products and
services?
Will customers that provide utilities to our
operations by ready?
Will customers be able to pay us on time?
Changes in our customers' operations may impact Praxair and we are
encouraging on-going communications to minimize impact on our customers
and on our own operations.
Impact of Legislation
On going communication with both our suppliers and our customers is
critical to the success of the year 2000 planning process. We have an
active and on-going communication effort aimed at responding to
customer inquiries, and gathering information that we need for our own
planning. It should be noted that these efforts have been accelerated
and facilitated by the passage of the Year 2000 Information and
Readiness Disclosure Act (15 USC 1 Note, P.L. 105-271, 112 Stat.) which
became law last October. It has allowed for the rapid dissemination and
receipt of important information under an umbrella of good faith. We at
Praxair very much appreciate the efforts that resulted in this
important legislation that has allowed industry to exchange information
that is useful for correction of the Y2K problem.
Contingency and Continuity Plans
We have instituted a two phased approach to help ensure that we can
continue to serve our customers around the world through January 1,
2000 and into the new millennium. Each business unit is developing
contingency plans and continuity plans aimed at minimizing disruptions
to our critical operations, internal systems and ability to supply
product to our customers.
Contingency plans provides detailed operating instructions to local
personnel in the event a failure occurs related to plants, facilities,
operating systems and critical suppliers. It includes the item
impacted, the failure scenario, a risk analysis, plans to mitigate the
risk, resource scenarios and key contact lists. These plans are
generally site specific and include local considerations related to
utilities, telephone services, security and fire alarm systems, and the
like. Each local plant has plans in place to allow continued operations
should telecommunications interruptions occur.
Continuity plans focus on mitigating potential failure across an
entire business unit, and develops business strategies to maximize
safety, delivery of product to customers and efficient operations.
These plans are expected to sustain the business in the event of a
year 2000 failure, adequately address safety considerations and comply
with the guidelines provided by the Praxair Project Office.
We will continue to review and `fine tune' these plans based on an
ongoing assessment our readiness and that of our suppliers. Rehearsals
of key components are scheduled during the third quarter of this year.
Readiness Status
Praxair has essentially completed the renovation and testing of
business processes, plant operations and computer systems critical to
safety and the company's business. All of Praxair's businesses around
the world have submitted Year 2000 Readiness Statements to chairman
Bill Lichtenberger, meeting our mid-1999 readiness target. In addition,
our corporate internal audit group will be conducting spot audits of
various Praxair facilities around the world to help assure meeting our
readiness goal.
As part of our readiness preparations, we will have a Global
Information Center, essentially a ``command center'', that will be
active throughout the millennium transition weekend. The center will
collect, manage and disseminate critical information, and provide
support, technical solutions and allocation of resources through the
transition period. Needless to say, we are continuing to refine our
plans for this effort as new information comes to our attention.
We do not expect catastrophic collapse of global infrastructures or
sustained outages. We do, however, anticipate that we will likely
experience temporary interruptions of electric power or other utility
supplies to one or more of Praxair's production plants due to failure
of the utility supplier to be year 2000 ready. The magnitude of impact
will, of course, depend on the number and nature of the interruptions
that might occur.
Throughout the remainder of the year we will be completing
scheduled work and testing our contingency and business continuity
plans, which will include testing of the ``command center''. In the
fall, we plan to conduct a global ``rehearsal'' of our contingency
plans. We believe these activities will provide another level of
readiness preparation should any external or unknown year 2000 problem
arise.
For more information, visit our web site at www.praxair.com, call
1-800-Praxair or e-mail your inquiry to [email protected].
__________
Responses of Charlie Krichbaum to Questions Submitted by
Chairman Bennett
Question 1. The Committee looked into the impact of Y2K on the
chemical industry earlier this year by requesting a study by the US
Chemical Safety Board and holding a field hearing on the issue. One
major area of concern is the paucity of information about the many
small- to medium-sized enterprises in the industry. While small- to
medium-sized firms are a general concern in all sectors when it comes
to Y2K readiness, the consequence of an accident associated with these
companies is disproportionately greater in the area of chemicals and
gases. What is your assessment of the small firms that are either your
suppliers or customers? What percentage fall into the high risk, high
consequences category? Are they taking the Y2K bug seriously? Do they
have the resources to fix the problem and/or develop workarounds? Is
there more that Federal, state or local governments could do to
heighten awareness and promote readiness by these companies?
Answer. Due to the nature of our business, our most critical
suppliers are those that supply electric power, natural gas and water--
not typically small firms. Our suppliers, regardless of size, who
provide critical equipment, systems and services around the world,
including electricity, natural gas and water, have been identified and
surveyed for their year 2000 readiness. While we have not segregated
our suppliers by size, we have not observed a discernable difference in
the level of cooperation based on size. We have assessed and are in
communications with approximately 900 utilities and 4,300 other
suppliers worldwide.
We have responded to inquiries from and have an ongoing dialog with
more than 6,000 of our customers, both large and small. We have not
observed any material differences in our customers' diligence in year
2000 readiness efforts based on their size.
Question 2. You mentioned the Praxair operates in 43 countries
around the world, which is certainly a respectable cross-section of the
world's nations. Have your assessments of local infrastructures caused
you to be more concerned about certain regions more than others? Are
you finding it necessary to develop regional contingency plans as
opposed to national plans; for instance, if there is a regional failure
of infrastructure such as transportation services or electric power?
Answer. We anticipate that disruptions are more likely to occur in
the less developed countries in which we operate. However, contingency
plans at the local level are in place throughout Praxair that provide
detailed operating instructions to local personnel in the event a
failure occurs related to plants, facilities, operating systems and
critical suppliers. These plans are generally site specific and include
local considerations related to utilities, telephone services, security
and fire alarm systems, and the like. Each local plant has plans in
place with respect to continued operations should telecommunications
interruptions occur.
Question 3. With your operations in 43 nations around the globe,
are you finding differences in your employees' sense of importance of
being ready for Y2K? Has Praxair found that it needs to tailor its Y2K
message to regional sensitivities and sensibilities?
Answer. All of Praxair's businesses around the world are actively
participating on our year 2000 readiness planning process. Because we
operate around the world, we accommodate regional and local differences
as a normal part of our daily business operations, and year 2000
planning is no different.
We have been publicizing our year 2000 activities in our internal
global publications (print and electronic) for the last two years and
believe Praxair employees worldwide have a common basic understanding
and awareness of the issue.
Question 4. Have there been any cases where Praxair has found that
its assessment of the local infrastructure runs counter to the local
government's assessment of the situations? If so, please explain.
Answer. Praxair's assessments of local infrastructures are
generally in line with external assessments. While we do not expect
catastrophic collapse of infrastructures or sustained outages, we do
anticipate that we will experience temporary interruptions of electric
power or other utility supplies to one or more of our production plants
due to failure of the utility supplier to be year 2000 ready. We expect
that these disruptions are more likely to occur in the less developed
countries in which we operate.
Question 5. You mentioned that Praxair is planning a corporate
Global Information Center. This Committee is finding that many
industries and individual corporations are planning something along
this line. The Federal Government is planning an International
Coordination Center with similar thoughts in mind. Do you see some
benefit in coordinating all these activities? Would Praxair share with
others what it is observing either inside or outside its plants and
facilities around the globe as the millennium date change progresses?
Answer. We are periodically posting year 2000 readiness disclosure
information to our web site (www.praxair.com) and we plan to continue
updating the site through the millennium date change. Other
organizations may be planning similar use of the Internet, which will
likely provide an efficient and cost effective method for sharing
information.
__________
Prepared Statement of Patrick M. Roberts
Chairman Bennett and Members of the Senate Special Committee on the
Year 2000 Technology Problem, I am pleased to speak to you today
regarding the issues facing global corporations with respect to foreign
suppliers and operations related to their Y2K preparedness.
Background
Royal Ahold is the rapidly expanding international parent company
of retail supermarkets, health care stores, and hypermarkets in Europe,
the USA, Asia and Latin America. We employ some 280,000 associates
around the world in more than 3700 stores. Last year, our sales
exceeded $31 billion USD and we serve more than 20 million customers
weekly.
Ahold USA, a subsidiary of Royal Ahold, is headquartered in
Atlanta, Georgia, and is the 4th largest grocer in the US. The company
has grown aggressively over the past 5 years through internal
expansions and also by acquisition. Last year's USA sales of over $20
billion, came from the approximately 1000 stores operating under the
brand names of Stop & Shop in New England, Giant-Landover in the
Washington/Baltimore metropolitan area, Giant-Carlisle in Pennsylvania,
Tops in northwestern New York, and BI-LO in the Carolinas. In March,
Ahold announced its intention to acquire Pathmark stores in the New
York metropolitan area.
My statements today address Ahold's Year 2000 initiatives and our
preparedness as a subsidiary of Royal Ahold.
Ahold Year 2000 Initiative
Ahold is taking the Year 2000 problem seriously and has
aggressively addressed all identified technology and business issues.
Total project spending will be in excess of $50 million. Ahold began
its Year 2000 efforts in 1996 with a set of technology projects to
consolidate and replace a majority of our legacy systems. In 1997 and
1998, our focus primarily was on technology. We formed an enterprise-
wide project office to oversee the assessment, remediation, and re-
deployment of our mission critical systems. We initiated contingency
planning. This year, our focus is on Business Continuity Planning and
Event Management planning. Up until The Event, we will continue to
perform software testing both internally and, whenever possible, with
critical external vendors. On those items over which we have direct
control, we are confident that our early start and hard work will
result in little to no impact in our operations.
Ahold Dependence on Foreign Entities and Operations
Ahold supports an autonomous operating company model, both foreign
and domestic. To support this model we have established synergy groups
which address our product supply chain and parts of our business that
do not directly touch the customer; ie. the back office operations in
the stores.
Our dependence on foreign companies is focused in our supply chain
with re-sellable products. Overall, we have classified the risk of a
disruption in our international supply chain as a low probability of
occurring, a high potential impact if there was a disruption, and a
moderate ability to proactively address. We are addressing this
exposure through our Year 2000 Supply Chain methodology, as follows:
1. Inventory and Assessment of our Suppliers
2. Due Diligence regarding Supplier Readiness
3. Communication and Awareness and
4. Contingency Planning
We have prioritized our supply chain based on the potential impact
to Ahold's business and the criticality of products they supply in the
event of an emergency. Less than 5% of sales are from products we
directly source from international companies. At the same time,
however, we estimate that 25% of sales volume has some kind of
international component. Categories of items with high levels of
international sourcing include:
Spices, sugar, rice, specialty grocery
Produce; ie. bananas and soft fruits
Coffee, tea
General Merchandise, Promotional Products
Pharmacy
Based on our research and in-depth discussions with almost 250 of
our top-critical suppliers, our findings have led us to rate the
potential for disruptions in our business from international sources as
low:
A great deal of international product has significant
inventory in the US that provide us a buffer; ie. spices, sugar, rice
and specialty grocery items. Our most critical suppliers are large
corporations that, on the whole, are taking Year 2000 seriously and are
applying the resources required to correct the problem within their
companies, including in-depth interrogations of their international
suppliers. Also, they are developing contingency plans to minimize
exposure from failures in foreign operations.
Through ongoing communications with one of our large
suppliers in the produce category, we have determined that it:
1. owns its farms in foreign countries,
2. is complete with its critical technology correction projects,
3. owns a majority of the transportation chain,
4. has visited the primary ports to assess potential risks,
5. has met with US Customs to assess potential concerns, and
6. is using this information to actively create contingency plans.
In the soft fruits category, our winter crop comes from Chile; ie.
grapes, nectarines, peaches, etc. While we plan to have a variety of
soft produce in our stores, sales in this area are generally very low
during this time frame due to the increase in prices from imports.
Coffee and tea are purchased through commodity futures.
What this means to the consumer is that the inventory supply chain
would last several months after The Event. Commodity suppliers usually
have 90-180 days of inventory in the supply chain.
General Merchandise and Promotional items have a natural
window of several months duration. The majority of the seasonal and
holiday merchandise, up to Valentines Day, is in the distribution
centers several weeks prior to Christmas.
Perhaps our largest area of vulnerability is with
pharmaceuticals. From our research, more than 70% of drugs sold have
some foreign component. For most, there is no good alternate supplier.
Many of these products are necessary to the continued good health of
our customers and our country's citizens. This is the area over which
we have the least control, and potentially, the highest risk. Red Cross
and FEMA recommendations that people prepare for Y2K as one would for a
severe weather situation, appears to be an adequate preparation
strategy.
Because these suppliers are third parties, and therefore, not in
our direct control, Ahold never will be able to eliminate international
exposure entirely. Based on our analysis of our top-critical suppliers,
we have a ``high'' confidence rating in their Y2K preparedness. We will
continue our dialogs with our major suppliers and refinement of our
contingency plans through the end of the year.
Year 2000 Merchandising Plans
In regards to merchandising products, New Year's 2000 has two
meanings for Ahold.
1. Ensuring that we can provide customers with necessary products
before, during and after the turn of the century.
2. Providing the food, products and services in response to
preparing for the party of the century.
Specific to Year 2000, Ahold does anticipate increased demand for
emergency types of items during the last four months of the year and is
preparing to meet this demand. New Year's is traditionally a peak time
in the grocery business. Ahold is anticipating demand for this New
Year's to be much greater than we have seen before. We are not
increasing inventories for re-sellable products as a Y2K contingency
except in a few cases; however, we will closely monitor product usage
and increase our orders if necessary.
We believe the greatest unknown in predicting demand is the media.
If the media promotes sensible actions and reactions to events, we
believe there will be no shortage of products. If the media negatively
publicizes year 2000 disruptions, regardless of their severity, Ahold
will likely encounter product shortages as a reaction to, not as a
result of the Year 2000 disruption.
Business Continuity Planning
Ahold is actively developing contingency plans to address potential
disruptions. We have broken our business into 24 classes, or areas, in
which plans are being created. In addition, we have identified more
than 100 processes that our individual business units are addressing at
a local level. We are planning to conduct exercises to test these
plans.
One contingency that has been explored relative to international
suppliers is to utilize our parent company, Royal Ahold, with its
global supply chain and local presence in most major markets to assist
in restoring any disruption.
Another major initiative in this area is the creation of the Event
Management plan. This addresses how we will prepare for, monitor and
react to Year 2000 related disruptions. The plan will encompass not
only the technology operations, but day-to-day operations of our
stores, warehouses and administrative facilities.
Communications
Communications are critical to successfully reducing the potential
risk of Year 2000 disruption. We have 5 primary audiences for which our
Project Office has active Year 2000 communications plans:
Ahold internal
Food/Retail Industry
Suppliers
Local communities
Customers
We have a sizable team that is dedicated to communicating with our
suppliers. They assess each company's Year 2000 efforts; educate the
supplier on areas in which we deem they need assistance; and follow-up
with those that are given ``low'' and ``moderate'' confidence ratings.
The Food Marketing Institute has done an excellent job assisting us
with Local community relations and facilitating cooperation across our
industry. I applaud their efforts. A most encouraging part of our
conversations with our major suppliers has been their openness and
candor regarding their Y2K readiness programs, including their ``deep
dives'' into their supply chains and the strategies they are pursuing
in their business contingency plans. We have seen a significant
increase in requests for participation in community events. Although we
respond to most of these, the volume has kept us from attending all of
them. Publications are being distributed to our customers to let them
know we will be here on January 1st and beyond.
Summary
Ahold anticipates minimal disruption caused by our direct and
indirect dependence on foreign suppliers. We have expended significant
effort in developing business continuity plans to minimize our risks.
There has been and will continue to be open and frequent communications
with our suppliers to address all new issues.
We believe there are real and tangible benefits to Ahold USA in
being a subsidiary of a truly global company with strong business
relationships with multiple major product suppliers in diverse
locations.
At the same time, we would say that there is real risk of Year 2000
disruption within the grocery industry and across other industries
relative to Year 2000 readiness. We do believe some foreign countries
and companies have not sufficiently addressed the Year 2000. Our
strategy is to find alternate product sources to minimize our
dependence on these countries.
We are aware that Congress is working diligently to ensure our
infrastructure will be ready for The Event. We would ask that Congress
look at providing further assistance in areas that Ahold has identified
that may have a potential impact to the health and safety of all US
citizens, namely, responsible reporting by the media. Additionally, we
request your support in ensuring the readiness of our federal programs
administered at the state level; specifically the Electronic Benefits
Transfer (EBT) program that affects our citizens who may not be able to
plan ahead for any temporary business disruptions.
I am happy to answer any questions you may have.
__________
Prepared Statement of Senator Gordon Smith
Good morning and welcome to today's hearing on the Year 2000
challenges facing our global corporations.
As a former businessman, I understand the impact that our
international economy has on our national boundaries. Today, very few
countries are economically self-sufficient without the presence of
global corporations.
Global corporations are among the world's biggest economic
institutions. A rough estimate suggests that the 300 largest global
corporations own and control at least one-quarter of the entire world's
productive assets. Global corporations' total annual sales are
comparable to or greater than the yearly gross domestic product of most
countries. Though based predominantly in Western Europe, North America,
and Japan, global corporations' operations span the globe.
Global corporations face many of the same issues as domestic
companies, such as maximizing profits, meeting customer demands, and
adapting to technological change. Global corporations must also stay
current with trends and events in the various countries where they
operate.
All nations are tied into a global economic interdependence.
International trade consists of a broad array of commercial interests
and relationships that involve most products and service sectors.
These, in turn, rely on a global web of critical services.
Disruptions in the relationships among suppliers and customers
abroad can seriously affect the well-being of individual companies,
specific industry sectors, and even international economies.
As our committee has examined in the past, many important
components of the international trade system are highly computerized,
interdependent, and very sensitive to the Y2K date-related changes. The
most important components of the infrastructure are energy production
and distribution facilities, transportation modes, communication
channels, and financial networks.
Breakdowns in any part of the trade support structure could slow or
halt shipments of key components needed to keep factories working,
hospitals functioning, food in continuous supply, and people employed.
As of today, there are only 162 days remaining until January 1,
2000.
With this in mind, I want to stress the importance of ensuring the
participation of executives at all levels of business and government in
planning for such an event.
This problem will not simply go away. Each of us must do our part
to make certain that the Y2K problem in adequately addressed.
As we work together, I am sure that we will develop a greater
understanding of this problem and forge effective solutions. It is our
cooperation which will bring us together and allow us to reach our
final goal.
I would like to welcome all the witnesses who are before us today.
We are particularly pleased to have representatives from Fortune 100
companies who are household names. Your willingness to step forward in
this forum to testify on this critical issue affecting your business
and the global economy is commendable.
__________
Prepared Statement of George Surdu
Good morning. I first would like to thank the Senate Committee on
the Year 2000 for affording Ford Motor Company the opportunity to
provide us an update on our Year 2000 Program. My name is George Surdu,
and I am the Director of Technical Services, and Ford Motor Company's
Year 2000 Global Program Manager. I have been the Year 2000 Global
Program Manager since the inception of the Company's formal program in
1996.
In 1996, Ford Motor Company initiated a formal program to address
the Year 2000 challenge. A senior level steering committee was
established, co-sponsored by our Chief Financial Officer, our vice
President of Quality and Process Leadership and our Chief Information
Officer. A global Year 2000 Central Program Office was created under my
leadership, and a robust program management process was created to
guide compliance actions across all potential impact areas. Areas
identified include: Business Computer Systems; Technical
Infrastructure; Plantfloor Equipment; Product Development Test
Equipment; Suppliers, Dealers and Affiliates; End-User Computing;
Building Infrastructure; and Vehicle Components. In addition, we have
continued to monitor the compliance actions of other impact areas such
as our transportation carriers, medical equipment suppliers and customs
offices. The sophistication of Ford's Y2K program was recognized by the
Information Technology Association of America with a certification that
Ford's program meets its challenging Y2K ``best practices'' standards.
Stretch compliance objectives were established for all impact
areas, with the majority of work to be completed by mid-year 1999.
Summer shut-down periods are being used to complete remediation work.
As of June month-end, 98% of critical business systems and 97% of all
business systems have been remediation, tested and back in service. In
addition, an enterprise test plan for all key business processes has
been developed, with completion scheduled for September.
For plant floor equipment, Ford has implemented a process to assess
equipment and machinery in its 167 manufacturing and assembly plants
and parts warehouse facilities. Presently, 99% of all plant floor
equipment is compliant.
In conjunction with the Automotive Industry Action Group in North
America, and other industry trade associations such as the VDA in
Europe, Ford has been participating in a global supplier readiness
program for production and critical non-production suppliers. As of
this report, about 80% of suppliers responding are deemed ready, with
100% to be ready by year-end. About 10% have not responded; additional
actions are underway to validate status of these suppliers and others
that do not anticipate readiness by September. A similar program has
been established for Ford's affiliates. As of June month-end, 89% are
ready, with 100% slated to be ready by December 1999.
Compliance status for the other impact areas include: 87% of all
critical Product Development Test Equipment; 97% of End-user Computing;
96% of our Technical Infrastructure; 83% of in-dealership systems; and
97% of all physical properties and infrastructures. Finally, 100% of
the components in our vehicles are compliant.
As stated in our most recent SEC filing, Ford estimates its total
Y2K spending to be about $403 million, incurred over a three-year
period that commenced mid-1997 and will end mid-2000. This outlay
constitutes about 10% of our total annual information technology
budget.
Ford Motor Company is confident as to its readiness, as well as
that of its affiliates, dealers and suppliers. However, the
interdependence of the entire supply chain does represent the greatest
risk to Ford. In particular, an extended infrastructure failure, that
is electric, gas and water, would make it difficult to operate
manufacturing operations. Accordingly, during the fourth quarter of
1998, we began the development of business contingency plans for all of
our critical business processes. Most of these plans are now complete.
Validation of all contingency plans will be completed in September. In
addition, Ford has created a Global Y2K Response Center to be used as
an information clearinghouse for the most current status available as
we enter the new millennium, and critical systems are being processed
through an Independent Verification and Validation Program as a final
check for readiness. Finally, a number of employees are being notified
now to serve as on-site or on-call support over the holiday period to
coordinate a response to any unexpected glitches that may be
experienced by Ford or those who rely on Ford's consumer products and
services.
This concludes my prepared statement. I would again like to thank
the Senate Committee for this time to provide an update on Ford's Year
2000 Program. I would now be happy to respond to any questions you may
have.
__________
Responses of George Surdu to Questions Submitted by
Chairman Bennett
Question 1. You testified that an ``enterprise test plan'' for all
key business processes has been developed, with completion scheduled
for September. Would you provide additional details about this plan? Do
you plan to do a full end-to-end test of all your systems?
Answer. The Ford Motor Company's enterprise test strategy has
focused on testing all cross organizational and external interfaces for
all critical business landscapes. This strategy was chosen rather than
``end-to-end'' testing for several reasons, including the magnitude of
the Company's enterprise portfolio (2400 systems with 340 million lines
of code), regional complexities (North and South America, Europe, and
Asia Pacific) and the completion of all critical inter-organizational
integration testing by 1Q1999.
Critical landscapes, or key business processes were identified in
all major regions of the Company, and include: Order to delivery,
Material supply to assembly, Material supply to Manufacturing,
Regulatory reporting and cash flow, and Service part order fulfillment.
The enterprise test strategy focused on testing all of the cross
organizational and external interfaces that were identified within each
of these landscapes. Over 50 landscapes, 700 interfaces, across 16
countries were successfully tested by October 1999.
Question 2. You testified that Ford had been participating in a
global supplier readiness program for production and critical non-
production suppliers. Can you explain how this program operates, and
precisely what Ford's participation has been?
Answer. Ford, along with other major OEMs is an active
participation in two automotive industry groups, the Automotive
Industry Action Group (AIAG) and the Verband der Automobilindustrie
(VDA). Both of these groups have Year 2000 task forces where OEMs come
together to communicate in a consistent manner with our common supply
base. In the AIAG Year 2000 Task Force, a number of initiatives have
been underway for the sole purpose of making our suppliers aware and
ready for the rollover. Significant ones include: 1) Training courses
such as program management for Year 2000 and contingency planning were
developed and made available to our global supply base. 2) A Web based
Self Assessment Questionnaire has been deployed so that suppliers can
report their Year 2000 readiness status monthly to their OEMs. 3) A
remediation assistance program, developed to assist and audit
suppliers' Year 2000 programs has been underway since 1998. 4) A follow
on program to give suppliers assistance in creating contingency plans
is running through the 4th Qtr 1999. These initiatives were shared with
the VDA in Europe, and implemented there, as appropriate.
The scope of the initiatives includes all the regions of the world
where Ford has key suppliers. Ford's participation has been hands-on,
taking a leadership role in developing and guiding the program, as well
as providing resources and funding.
Question 3. You testified that, as of now, about 80% of suppliers
responding are deemed ready, with 100% to be ready by year-end, and
that, for Ford's affiliates, 89% are ready, with 100% to be ready by
December 1999. Isn't December cutting it a little close to expect these
suppliers to be ready? How will you be monitoring their progress? If
their progress doesn't track toward compliance on schedule by the end
of the year, what are your contingency plans?
Answer. To update the Senate, our suppliers report 97% are complete
now, still forecasting 100% to be ready by year end. The majority of
suppliers reported being ready by June 1999. The remaining suppliers
have been dealing with recently uncovered issues, or less significant
applications/hardware, not critical to production. Further, these
suppliers report a high percentage (>90%) of work complete, closing in
on 100% complete.
Ford set a target for our suppliers to be ready, the same as our
internal target, which is June 1999. For those that have strayed beyond
that target, actions have been taken to determine what areas of their
work is not complete, its impact to Ford and their ability to work
around the issue. Once this information is known, Ford is in a better
position to determine what contingency actions are appropriate.
Progress has been monitored through the AIAG Self Assessment Website,
where suppliers are requested to update their status monthly. In
addition Ford mails the status and Ford's expectations to the
supplier's executive management, advising them of any concerns we have,
making them aware of Year 2000 risks and relaying best practices for a
prudent business person to use. Throughout the data collection period,
suppliers have consistently indicated they will be ready before January
2000. Therefore we believe the most effective contingency strategy is
to share best practices so they can make themselves ready.
Despite the optimistic forecast, Ford has advised suppliers to
develop contingency plans to handle whatever might happen. Where there
is a high probability of risk or high impact to Ford, Ford is requiring
suppliers to build a few days of finished goods as protection.
Question 4. Do you have any plans to curtail or terminate
relationships with critical suppliers who are not on track to be Y2K
compliant by the end of the year? Are you confident that Ford can
continue to produce cars and trucks if some of your critical suppliers
are not ready?
Answer. Ford monitors all aspects of supplier performance, as well
as Year 2000 readiness. We have no indicators at this time that would
warrant changes in relationships for Year 2000 reasons. The Self
Assessments from the suppliers state they are ready and we have
expectations of the suppliers to ship on time. Regarding Ford's
confidence in continuing production if a critical supplier is not
ready: Ford faces similar supply issues of varying magnitude on a daily
basis. These issues are caused by many different conditions, such as:
natural disasters, bad weather, power outages, equipment failures,
human error. A Year 2000 problem will manifest itself in similar ways,
so Ford and its suppliers are experienced in dealing with these types
of problems.
Question 5. Can you describe Ford's contingency plans worldwide in
the event of failures in critical infrastructures, such as utilities?
What is your assessment of the international transportation sector?
Answer. Ford will deploy its existing contingency plans for
infrastructure failures. Key areas such as North America, Western
Europe and South America have very reliable infrastructure support, and
are forecasted as green. The risk and probability there does not
warrant extraordinary back-up measures, since any outages are likely to
be brief and minor. Transportation is forecasted as green for the air,
rail, ocean and truck services that Ford engages. Ford has been in
contact with logistics providers as our eyes and ears around the globe.
Their regional assessments for key areas have been optimistic.
Question 6. In your testimony you mentioned that you would be
setting up a Global Y2K Response Center. Will this center communicate
with other large Y2K response centers in similar companies or with the
Federal Y2K Information Coordination Center?
Answer. The Global Y2K Response Center was launched on July 1st of
this year. The center is an information clearinghouse for the most
current Y2K status available as we enter the new millennium within
Ford. We have agreements from selected partner companies to share Y2K
information around the rollover period. We currently plan to
communicate with the Federal Y2K ICC and are awaiting their published
procedures.
__________
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
------
Prepared Statement of General Motors
Executive Summary
GM anticipates no problems with past, current, or future model
vehicles, and no significant disruption of GM's business as a result of
the Year 2000 problem.
GM's passenger vehicles, with their growing use of sophisticated
electronics, were among the company's earliest priorities for analysis
of potential Y2K-related problems. GM vehicles have long been equipped
with microprocessors which today, depending on the vehicle, are used
for powertrain management, automatic climate control, anti-lock braking
systems, traction control, stability enhancement, driver information
centers, supplemental inflatable restraint systems, head-up display,
real-time damping, navigation systems, seat, steering column and mirror
memory positioning, remote keyless entry, entertainment systems,
interior and exterior lighting systems, entry control, cellular
communications and anti-theft systems.
GM has analyzed the microprocessors in its current and planned
models. Additionally, the company has checked the microprocessors in
past models dating back to when we first started installing ``date
processing-capable'' microchips in our cars and trucks. GM found most
of these electronic systems have no date-related functionality and,
therefore, pose no Year 2000-related problems. Those few systems that
have date-related functionality were found to be Year 2000 ready.
GM is executing a comprehensive global plan to make GM Y2K ready.
Milestones of the plan include the following:
The plan's major process steps include inventory,
assessment, remediation, system testing, implementation, readiness
testing, and contingency planning.
GM is working to maintain uninterrupted electronic
communications with its dealers, suppliers and other companies with
whom it does business.
Comprehensive Global Supplier Y2K Readiness is a vital
part of the program.
Remediation of systems is substantially completed.
Testing will occur throughout 1999 to confirm GM's Year
2000 readiness.
Contingency plans are being developed and put in place.
The details of the plan are attached.
GM's Year 2000 Program
Many computerized systems and microprocessors that are embedded in
a variety of products either made or used by GM have the potential for
operational problems if they lack the ability to handle the transition
to the Year 2000. Because this issue has the potential to cause
disruption of GM's business operations, GM has developed a
comprehensive worldwide program to identify and remediate potential
Year 2000 problems in its business information systems and other
systems embedded in its engineering and manufacturing operations.
Additionally, GM has initiated communications and site assessments with
its suppliers, its dealers and other third parties in order to assess
and reduce the risk that GM's operations could be adversely affected by
the failure of these third parties to adequately address the Year 2000
issue.
One of GM's first priorities was the analysis of microprocessors
used in GM passenger cars and trucks. This review included all current
and planned models as well as the electronics in older cars and trucks
produced during the period of approximately the last 15 years. GM began
installing microchips capable of processing date information
approximately 15 years ago. Most of the processors reviewed have no
date-related functionality, and accordingly have no Year 2000 issues.
Of the vehicles with processors that perform date-related functions,
none have any Year 2000 issues.
GM's Year 2000 program teams are responsible for remediating all of
GM's information technology and embedded systems. Information
technology principally consists of business information systems (such
as mainframe and other shared computers and associated business
application software) and infrastructure (such as personal computers,
operating systems, networks and devices like switches and routers).
Embedded systems include microprocessors used in factory automation and
in systems such as elevators, security and facility management. GM's
Year 2000 program includes assessment and remediation services provided
by Electronic Data Systems Corporation (EDS) pursuant to a Master
Service Agreement with GM.
The Year 2000 program is being implemented in seven phases, some of
which were and are being conducted concurrently:
Inventory--identification and validation of an inventory of all
systems that could be affected by the Year 2000 issue. The inventory
phase commenced in earnest in 1996 and is substantially complete. GM
has identified approximately 6,100 business information systems and
about 1.4 million infrastructure items and embedded systems.
Assessment--initial testing, code scanning, and supplier contacts
to determine whether remediation is needed and developing a remediation
plan, if applicable. The assessment of business information systems is
substantially complete and included a determination that about one
quarter of such systems should be regarded as ``critical'' based on
criteria such as the potential for business disruption. The assessment
of infrastructure items and embedded systems was substantially
completed by the end of 1998.
Remediation--design and execution of a remediation plan, followed
by testing for adherence to the design. GM has substantially completed
the remediation of its critical and non-critical systems. A small
number of systems will be remediated or replaced in 1999.
Inconsequential systems have been and will continue to be removed from
GM's Year 2000 inventory and will not be remediated. GM believes that
it will meet its targets for Year 2000 readiness.
System Test--testing of remediated items to ensure that they
function normally after being replaced in their original operating
environment. This phase is closely related to the remediation phase and
follows essentially the same schedule.
Implementation--return of items to normal operation after
satisfactory performance in system testing. This phase follows
essentially the same schedule as remediation and system testing.
Readiness Testing--planning for and testing of integrated systems
in a Year 2000 ready environment, including ongoing auditing and
follow-up. Readiness testing is currently under way. This phase
commenced during the fourth quarter of 1998 and is expected to be the
major focus of the Year 2000 program throughout 1999.
Contingency Planning--development and execution of plans that
narrow the focus on specific areas of significant concern and
concentrate resources to address them. GM currently believes that the
most reasonably likely worst case scenario is that there will be some
localized disruptions of systems that will affect individual business
processes, facilities or suppliers for a short time rather than
systemic or long-term problems affecting its business operations as a
whole. GM contingency planning continues to identify systems or other
aspects of GM's business or that of its suppliers that it believes
would be most likely to experience Year 2000 problems. GM contingency
planning also addresses those business operations in which a localized
disruption could have the potential for causing a wider problem by
interrupting the flow of products, materials or data to other
operations. Because there is uncertainty as to which activities may be
affected and the exact nature of the problems that may arise, GM's
contingency planning will focus on minimizing the scope and duration of
any disruptions by having sufficient personnel, inventory and other
resources in place to permit a flexible, real-time response to specific
problems as they may arise at individual locations around the world.
Some of the actions that GM may consider include the deployment of
emergency response teams on a regional or local basis and the
development of plans for the allocation, stockpiling or resourcing of
components and materials that may be critical to our continued
production. Specific contingency plans and resources for permitting the
necessary flexibility of response are currently being developed and put
into place.
GM's communication with its suppliers is a focused element of the
assessment and remediation phases described above. GM is a leading
participant in an industry trade association, the Automotive Industry
Action Group, which has distributed Year 2000 compliance questionnaires
as well as numerous awareness and assistance mailings to about half of
the 90,000 supplier sites that service GM throughout the world.
Responses to these questionnaires, which were generally sent to GM's
principal suppliers, have been received from about half of the supplier
sites to which they were sent. Many of the non-responding suppliers are
communicating directly with GM on an informal basis. Additionally, GM
has initiated its own review and assistance program for suppliers
considered to be critical to GM's operations, including more than 3,900
on-site assessments to date, and Y2K program management workshops for
over 2,500 supplier companies. These assessment efforts have been
substantially completed with respect to the critical supplier sites.
Based on its assessment activity to date, GM believes that a
substantial majority of its suppliers are making acceptable progress
toward Year 2000 readiness. Additionally, GM has established a program
to provide further assistance to suppliers that desire more input or
that are believed to be at high risk of noncompliance as a result of
the foregoing assessment efforts. This supplier assistance program
currently includes providing remediation consultants to work with
suppliers on developing, implementing, and/or accelerating their own
Y2K readiness efforts.
With specific regard to the ``off-shore'' component of the critical
GM suppliers mentioned above, our readiness activities are being
managed by a global Y2K supplier readiness organization with regional
offices and personnel in Mexico City, Mexico; Ruesselsheim, Germany;
Sao Paulo, Brazil; Melbourne, Australia; and Singapore, in addition to
our supplier program headquarters in Detroit, MI.
Of the critical supplier sites being tracked globally in 54
countries for specific risk management action, approximately 35% are
outside of North America. Of the 3,900 on-site supplier and utility
assessments conducted in 44 countries, 55% have been outside of North
America. Of the high-risk suppliers identified in the assessment phase
and being provided direct remediation assistance, 77% are outside of
North America.
GM's contingency planning efforts described above are also expected
to address any critical suppliers that GM identifies as being at high
risk of encountering Year 2000 problems. Further, in regard to our
``off-shore'' focus, we are placing a high priority on contingency
planning, Y2K command centers in the U.S. and around the globe, and
additional in-depth risk management for those countries and global
regions which as a result of the above risk management actions show a
high concentration of failure-likely suppliers or utility sites.
GM also has a program to work with its independent dealers on their
Year 2000 readiness. This program includes distributing materials that
assist dealers in designing and executing their own assessment and
remediation efforts. GM has also included Year 2000 compliance criteria
as part of its established program for certifying that third-party
business information systems properly interface with other systems
provided to dealers by GM.
GM's direct Year 2000 program cost is being expensed as incurred
with the exception of capitalizable replacement hardware and, beginning
in 1999, internal-use software. Total incremental spending by GM is not
expected to be material to the Corporation's operations, liquidity or
capital resources.
In addition to the work for which GM has direct financial
responsibility, EDS is providing Year 2000-related services to GM, as
required under a Master Service Agreement. These services are being
provided by EDS as part of normal fixed price services and other on-
going payments to EDS.
GM's current forecast is that its total direct expenditures plus
the value of services performed by EDS attributable to GM's Year 2000
program will be between $540 million and $600 million. This amount
includes the following:
An estimated $350 million to $410 million in direct GM
expenditures. This estimate includes a $60 million payment from GM to
EDS at the end of the first quarter of 2000 if systems remediated by
EDS do not cause a significant business disruption that results in
material financial loss to GM; and
An estimated $190 million representing EDS' expenditures
attributable to GM Year 2000 program.
GM's total Year 2000 costs noted above do not include information
technology projects that have been accelerated due to Year 2000, which
are estimated to be approximately $20 million,
In view of the foregoing, GM does not currently anticipate that it
will experience a significant disruption of its business as a result of
the Year 2000 issue. However, there is still uncertainty about the
broader scope of the Year 2000 issue as it may affect GM and third
parties that are critical to GM's operations. For example, lack of
readiness by electrical and water utilities, financial institutions,
government agencies or other providers of general infrastructure could,
in some geographic areas, pose significant impediments to GM's ability
to carry on its normal operations in the areas or areas so affected.
Statements made herein about the implementation of various phases
of GM's Year 2000 program, the costs expected to be associated with
that program and the results that GM expects to achieve constitute
forward-looking information. As noted above, there are many
uncertainties involved in the Year 2000 issue, including the extent to
which GM will be able to successfully remediate systems and adequately
provide for contingencies that may arise, as well as the broader scope
of the Year 2000 issue as it may affect third parties that are not
controlled by GM. Accordingly, the costs and results of GM's Year 2000
program and the extent of any impact on GM's operations could vary
materially from those stated herein.
Note: The expenditures and other figures contained in this document
represent GM's latest estimates following the May, 1999, spin-off of
Delphi Automotive. Additional information of GM's Y2K readiness is
available at (www.gm.com) and (www.gmacfs.com).
__________