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Businesses that haven't yet begun Year 2000 conversion projects may find themselves behind the proverbial 8-ball if they don't get started soon, experts warn.

With the shortest conversion timetable set at 18 months, time is of the essence. In addition, resources-especially trained programmers-are becoming scarce as the Dec. 31, 1999, deadline approaches.

Yet a survey of 128 information technology officers at Fortune 500 companies this summer found that only a quarter of companies-24%-have a detailed conversion plan in place to achieve Year 2000 compliance.

Of the companies surveyed, only 16% have begun implementing a compliance strategy, according to the Year 2000 preparedness poll, released Oct. 7 by Cap Gemini America, a New York-based information technology consulting firm.

A similar poll of Fortune 500 companies, conducted last month by Rubin Systems Inc., a New York-based research firm, also found that a tight labor market for skilled personnel is hampering companies' ability to achieve Year 2000 compliance goals.

Year 2000 compatibility exposures exist in a lot more places than most would think, said Jim Woodward, Cap Gemini senior vp.

"All computer systems-like ATMs, those on airplanes, on satellites-anything that has a chip in it can have a Year 2000 failure," Mr. Woodward warned.

"If you have legacy systems-older mainframe-type systems-it's pretty much assured they're going to need some Year 2000 conversion," concurred Phil Overby, president of Synapse Computer Services Inc., an information technology consulting firm based in Branchburg, N.J.

"This is an insidious thing," agreed Bill Larsen, Year 2000 project manager at Frank Russell Co., an investment management firm based in Tacoma, Wash.

Indeed, the problem is more widespread than first thought.

One Midwest manufacturer that declined to be identified found that, even though it believed it had little or no exposure, as much as 70% of its systems were vulnerable after an assessment by an outside vendor.

Mr. Woodward pointed to the New Zealand Aluminum Smelters as an example of the harm likely if a computer system fails to recognize the Year 2000.

The New Zealand company had to spend more than $1 million to repair five pot cells that overheated when the computers shut down on New Year's Eve 1996 at the Tiwai Point aluminum smelter on South Island.

The main computer was not programmed to account for the extra day in the leap year.

As a result, each of the company's 660 process control computers hung up simultaneously at midnight on Dec. 31.

"Imagine that's a nuclear power plant," Mr. Woodward suggested.

After researching how conversion would affect one of its trucking industry clients, Lockton Cos., a Kansas City-based insurance brokerage and risk management consulting company, organized a Year 2000 task force to develop a strategy for all of its clients.

"We wanted to come up with a description, how it affects companies at different levels and insurance options," explained Joe DuCharme, Lockton's information manager.

For example, a client may have coverage under its general liability policies because the forms do not expressly exclude the Year 2000 exposure, according to the broker.

Realizing this, insurance companies are likely to start adding exclusions for Year 2000 exposures to policies that renew before the end of the millennium, Lockton warned.

So far, few insurers are writing coverage for Year 2000 risks, but Lockton expects the marketplace to expand.

New York-based American International Group Inc. already is offering one such policy, and Am-Re Managers Inc. announced last week in London it has launched a program in conjunction with Aon Risk Services.

While the Am-Re program, ARM 2000, provides up to $100 million in coverage limits, its primary focus is on managing and correcting the problem.

To meet this risk management objective, Am-Re and Aon have contracted with numerous information technology service vendors.

After evaluating the extent of its vulnerability to the millennium bug, the city of Chicago decided to scrap its existing management information systems and buy new ones, according to Elizabeth Boatman, chief information officer for the city.

Current cost estimates for converting the programs range from $1 to $1.25 per line of code. The city of Chicago's management information systems collectively have about 30 million lines of code, much of which is written in antiquated mainframe-based programming languages such as COBOL and UFO.

Furthermore, the city was using several different systems, some up to 30 years old.

"They were ready to be replaced anyway," Ms. Boatman pointed out.

While shopping the market, Ms. Boatman found that it would cost the city about half as much-about $15 million-to replace its existing systems with a newer and more centralized system.

For example, "we took some systems, like the animal control system used for licensing and tracking, and found out it would cost as much as $300,000 to fix. But an off-the-shelf system would cost just $30,000 or $40,000," she said.

Even after a new system is installed, the city also will have to pay for converting all of the data from the old system to the new system, testing and personnel retraining.

To meet the projected conversion costs, Ms. Boatman is asking the city to double the size of the budget allocated for MIS to $30 million for 1998.

In the meantime, a team of computer specialists is working on developing requests for proposal seeking bids on the city's Year 2000 project.

"All of this work will be outsourced," she said. "We don't have the manpower to do it ourselves."

Recognizing its potential exposures, San Francisco-based clothing manufacturer Levi Strauss & Co. has embarked on a Year 2000 conversion project. As have most publicly traded companies, Levi Strauss declined to provide details.

Security is tight for many corporate conversion projects because of the concern that their stock prices will fall when the word gets out about how much it will cost to bring their systems into compliance, explained William Fenwick, a partner in the Palo Alto, Calif., law firm of Fenwick & West, which is providing Year 2000 consulting services to clients.

"We have to report our conversion costs because the FCC requires us to report material expenses to shareholders," acknowledged Sandy Ball, project manager-Year 2000 at Puget Sound Energy Inc. in Bellevue, Wash.

Ms. Ball declined to reveal the utility's conversion costs until Puget Sound Energy's annual report is published.

Puget Sound Energy began its conversion project in early 1996, about a year before the company was created by the merger of Washington Natural Gas and Puget Power in February of this year, Ms. Ball said.

Because the two entities had delivered different types of energy, differences in their computer systems had to be reconciled even before Year 2000 compatibility was discussed.

The utility also faced a problem similar to that of the city of Chicago: "Most of our systems are quite old," Ms. Ball said.

After a thorough analysis of its varied systems, a decision was made to scrap some of the older components and reprogram others.

So, in effect, "we're not replacing the systems because of the Year 2000 issue," she pointed out. "What the Year 2000 really does is provide a deadline."

Because of its early start, Ms. Ball is hopeful Puget Sound Energy will meet that Dec. 31, 1999, deadline.

"We're going to be ready to test some applications soon," she said.

The utility has decided to test parts of the system in stages, she explained.

Testing is perhaps the single biggest cost for Year 2000 conversion projects, requiring many organizations to lease space on computers offsite so that both their old and new computer programs can run simultaneously, Cap Gemini's Mr. Woodward explained.

Fortunately, the number of vendors offering storage space for testing is growing, Mr. Woodward said.

For example, Cap Gemini has a storage facility in Tarrytown, N.Y., while Synapse's site is offshore in India.

In addition, numerous disaster recovery "hot sites" are being made available for Year 2000 conversion project testing.

But the space doesn't come cheap.

"If you went to IBM and said you wanted to replicate 50 gigabytes of MIT (millions of instructions per second) space for six months, it would cost $500,000," Mr. Overby estimated, using as an example the amount of space a midsize company might need.

"To lease it, the cost will be lower, but IBM will also want to sell you software," he said. "But if you only want to use it for testing, it may cost about $250,000.

Even though investment management company Frank Russell Co. started its formal Year 2000 conversion effort in late 1995, "we're still in the fray," said Mr. Larsen.

The target date for completion is mid-1999.

As did Puget Sound Energy and the city of Chicago, "we're going through all the areas of the company where there could be problems," and dividing systems into two categories-replace or reprogram, Mr. Larsen explained.

"Do you fix it, replace it, retire it or do you simply ignore it?" he asked.

In some cases, "if it doesn't impact operations, maybe you don't need to fix it," he suggested.

For example, "I've got a valid Washington State driver's license in my pocket that has '00' for its renewal date. But the state knows that it's good," Mr. Larsen observed.

Sarah Goddard in London contributed to this report