Y2K A CHALLENGE FOR MULTINATIONALS

The diversity inherent in international trade leads to a similar diversity in the issues that need to be addressed for international companies to solve their Year 2000 problems.

While many companies in the United States are on schedule to make their own internal systems Year 2000-compliant, third parties they deal with outside the United States often are way behind, consultants and risk managers say.

The different levels of awareness of the problem and the varying ability of organizations to deal with it creates a huge web of issues for international companies to embrace.

"International companies have a complicated problem to deal with," said Jim Woodward, senior vp at Cap Gemini America L.L.C., an information technology consultant in New York.

They have a wide range of other parties to deal with who are at varying stages in their understanding of the Year 2000 problem, he said.

"Even companies that are way ahead are facing supply chain issues with other companies that don't know where they are or are just flat out behind," Mr. Woodward said.

Although companies with international subsidiaries or suppliers face a similar range of Year 2000 problems as domestic companies, the problems are compounded by the geographic spread and the reduced access to skills to deal with the problems, Mr. Woodward said.

The principal concerns, outside of internal systems, are the systems of third parties that a company deals with, he said. For example, if a supplier is not Year 2000-compliant, it may not be able to provide vital supplies or resources if its system crashes, Mr. Woodward said.

Additionally, a non-compliant third party could corrupt a compliant system, he said.

"If you are receiving data with errors, it can become embedded in your own system," Mr. Woodward said.

Generally, companies in the United States are farthest ahead in their efforts to make their systems Year 2000-compliant, Mr. Woodward said.

"However, the U.S. also is probably the most automated economy," he said.

Economic development is a rough yardstick that can be used to determine the awareness and readiness to deal with a problem and also the potential scope of the problem, Mr. Woodward said.

L.L. Bean Inc. in Freeport, Maine, is reviewing the Year 2000 issue for all its international and domestic operations, said Steve Hewitt, director of risk management.

"We're considering everything, including our vendors and our vendors' ability to deal with the problem," he said.

One of the main issues for the clothing company will be transportation and the ability for shipments to clear customs both in the country of origin and in the United States, Mr. Hewitt said. Problems could lie in the vendors' systems or customs officials' systems.

Tricon Global Restaurants Inc. faces several international issues when addressing the Year 2000 problem, said Christopher E. Mandel, senior director, global risk management.

The Louisville, Ky.-based holding company for Pizza Hut, Taco Bell, and KFC restaurants has numerous operations in a wide range of countries, and many of those units have independent purchasing arrangements, he said.

Country managers for the restaurants have the responsibility to quiz their suppliers on their Year 2000 readiness, Mr. Mandel said.

The managers also have to decide whether to switch suppliers if they think there will be a problem or whether to renegotiate a contract with a supplier to ensure there is some indemnification if something goes wrong, he said.

"It can run the gamut," Mr. Mandel said.

Phillips-Van Heusen Corp., an apparel manufacturer in New York, has a large number of suppliers overseas, said Carla Eberling, director of risk management.

"The big challenge is determining what, if anything, they are doing to make sure that they will be in business after the Year 2000," she said.

To assess the problem, the company is sending questionnaires to suppliers, calling them to ask what measures they are taking and, in the case of major suppliers, making site visits to assess the problem, Ms. Eberling said.

So far, the company has found that some suppliers have so little automation that the Year 2000 bug will not be a problem for them, but for others "it's going to be a challenge," she said.

In general, most companies outside the United States do not appear to be taking remediation efforts as seriously as domestic companies, said Katherine Kanaga, managing director and co-chair of the client advisory task force at J&H Marsh & McLennan Inc. in New York.

So for U.S. companies with international operations, "suppliers, customers and contingent business interruption might be more of a concern," she said.

Ensuring there is adequate insurance coverage for those risks requires careful scrutiny of local and master policies, Ms. Kanaga said.

"We are finding that different insurance marketplaces are responding differently in terms of coverage and restrictions," she said.

For example, in Australia insurers are being more restrictive than U.S. insurers and are providing only coverage of named perils, not all-risk coverage, on property insurance contracts, Ms. Kanaga said.

"That can lead to inconsistencies in the underlayers, particularly if you have a (difference in conditions) policy over local policies. . . .You have to make sure that the DIC is ironclad," she said.

Policyholders also need to ensure that their liability coverage is consistent, Ms. Kanaga said.

Again, some overseas insurers are offering more restrictive coverage than U.S. insurers. In at least one instance, a foreign insurer is excluding coverage of bodily injury and property damage caused by a policyholder's Year 2000 problems, she said.

"On the domestic side, they are taking a more case-by-case approach with general liability policies," Ms. Kanaga said.

Tricon is examining its insurance coverage to determine whether it would adequately cover Year 2000 liabilities, said Mr. Mandel.

Tricon has an umbrella program over local policies where necessary with a large deductible, he said.

As the Year 2000 exposure is an unpredictable risk, Mr. Mandel said he would prefer to have insurance coverage for it.

But it is still unclear what coverage will be available. Some insurers plan to exclude the risk, but others are offering specific coverage, Mr. Mandel said.

"But I think they would want us to have a substantial deductible and pay sizable premiums," he said.

Phillips-Van Heusen is working under the assumption that it has no insurance for damage caused by Year 2000 problems, said Ms. Eberling.

The wordings of business interruption coverages are not clear, and insurers likely will turn down claims, saying Year 2000 problems are not fortuitous events, she said.

"I'm not precluding that we'll a make a claim; we are just taking the approach that insurance is not going to be a savior here," Ms. Eberling said.