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IT STRATEGY REVIEW – The 21st century’s double-whammy

The next two or three years are likely to go down as the most fraughto fix. That’s not true: there just isn’t enough time left to spend that much money. And as for the single European currency … and anguished in the half-century history of European corporate computing.

Computer and communications technologies offer new ways to reach potential customers and are dramatically improving the quality and availability of information on how the organisation is performing. But as business has grown more dependent on technology, it has become much more vulnerable to the risk of systems breaking down when their internal clocks change from 31/12/99 to 01/01/00.

The difficulties of dealing with the so-called millennium bug are compounded by the need to reconfigure financial systems to cope with the introduction of the single European currency during a three-year transitional period that starts in less than nine months.

Separately, the costs of dealing with these parallel problems are estimated by experts to range from #300 per employee in smaller firms to #2,000 for users on complex corporate information networks. But the consultants and directors interviewed for this article advise looking beyond the purely financial aspects of the twin threat to their existing systems.

Bryan Cassidy, the director responsible for tackling the two issues at Alliance & Leicester (see case study, next page), comments: “It’s not just an IT problem, it’s a business-wide issue and you need a business-led structure to tackle it. “Emu and the year 2000 are both mandatory and the latter is the ultimate fixed end-date project. You won’t be competitive after 2000 if you haven’t solved the problems.”

But, he adds, if you can solve it before rival firms, you will be able to free up resources to tackle business development projects that others are not able to undertake.

Malcolm Stirling, who heads Emu IT services at KPMG, emphasises that computer users need to understand that genuinely “future-proof” computer systems need to be designed from the ground up to cope with such monumental change. Once the year 2000 and Emu hurdles have been cleared, more will inevitably follow.

In the UK alone, Maurice Fitzpatrick, the head of economics at accountancy firm Chantrey Vellacott, predicts that the cost of converting computer systems to accommodate the date change from 1999 to 2000 will run to #50bn. Fitzpatrick estimates that #40bn will need to be spent by private firms, and #10bn by the public sector. To put the latter figure into perspective, the government announced in January that it had budgeted #370m to fix its central IT systems.

Robin Guenier, who has championed the millennium issue as director of the Taskforce 2000 initiative, says the government’s figure is ‘ridiculous’. “Compare that to the #5bn estimate of the FTSE-100 companies and it makes no sense,” he explains.

To Guenier, the frightening year 2000 cost projections are purely academic, as they ignore the computer industry’s capability to meet with the demand. “To date, Britain has only spent #800m on it. Even if there was a radical reprioritisation, the most the computer industry could cope with would be around #15bn between now and 2000. And the computing industry has a terrible record with deadlines.”

If the millennium bug is daunting, computer experts predict that the single European currency will be even worse – at least 1 January 2000 is a fixed deadline and systems analysts are reasonably comfortable with the processes required to debug business databases and application programs.

The euro, however, will require software companies to rewrite their core databases and algorithms. And from the project management point of view, the elastic transitional arrangements add to the complexity of the challenge, which in turn will add to the expense. Ironically, the difficulties posed by this technological double-whammy have proved to be a boon for financial systems suppliers, who are enjoying an unprecedented surge in sales. Through the lean years at the beginning of the decade, many companies held back on system upgrades until cashflows improved. The looming year 2000 and Emu problems uncorked this pent-up demand.

Big Six consultant KPMG recognised the business opportunity presented by the upgrade boom and established a dedicated economic and monetary union team. The firm’s message begins with the premise that customers should not be intimidated by the twin threat of the millennium and Emu into a crisis-management “siege mentality”.

“There is a trend for people to put the blinkers on and look exclusively at one or other of the issues,” says Stirling. “They shouldn’t neglect the opportunity to lift their head and put Emu and year 2000 solutions together. You would come up with a completely different solution if you looked at them separately.”

The PC boom in the 1980s and the rise of client/server systems in this decade both helped to complicate the process of upgrading computer installations, explains Stirling. “Many organisations have allowed PCs and small networks to propagate and empower the users, but they are not so proactive when it comes to solving IT problems,” he says.

Given that organisations will have to endure disruption to their IT systems over the next two years, Stirling advises combining audits of existing systems to assess the impact of both the millennium and Emu, and co-ordinate the implementation of new systems to cope with both. The re-engineering boom is also helping to bring the centralised IT department back into fashion after a period in the wilderness. As Stirling puts it: “People with IBM dumb terminals have an easy time of it. All the changes can be confined in the machine room.”

Major companies – including Sainsbury and Tesco – are retrofitting unfashionable mainframe systems to take on the database management functions for their core financial applications. They plan to run complex multi-user client/server applications, but, at the end of the day, all the data is dragged back to a central IT hub where it is stored in millennium-compatible files subject to old-fashioned security and back-up regimes.

On one level, users stand to benefit from the upgrade bonanza. London-based implementation consultant Dele Sikuade explains: “With so many organisations investing in new software to cope with Emu and 2000, the vendors are able to spend more money on research to produce better systems to cope with both.”

According to research from Tate Bramald Consultancy, almost 17% of existing financial IT systems are bespoke and many packaged solutions have been heavily customised. From direct experience of going in to sort out such systems, Sikuade says: “The people who had business knowledge when these legacy systems were written aren’t there anymore.”

Faced with the prospect of trying to re-engineer installations they do not fully understand, and do not have the in-house skills to support, companies are opting for replacement systems based on off-the-shelf software, whether mass-market PC packages from the likes of Sage and Pegasus, or enterprise systems from Oracle or SAP.

“With the year 2000 and Emu coming, people are learning to trust the package developers more,” suggests Sikuade. “No one wants to have to do this again and are happy for third parties to bear the costs of these overhauls.”

The recriminations, project management and cost implications stirred up by such major system overhauls are reflected in the country’s boardrooms. The mainframe revival mentioned above hints at a revival of the specialist IT director. But, on the other side of the coin, so much money is involved that finance directors have been forced to take an active role.

Research published in January by the Institute of Directors showed that 83% of British firms interviewed delegated board responsibility to the finance director – a hangover among many companies from when the first systems were introduced to handle accounts.

IT’s Emu and year 2000 problems are helping to clarify corporate thinking. As the Alliance & Leicester bank shows, taking a methodical approach, based on the organisation’s business priorities, can help to ensure that the company will not be thrown by such crises in the future. Rather than give responsibility to a specialist IT director, or the finance director, Alliance & Leicester has put a specialist risk management director in charge of the overhaul work.

Finance directors should welcome this trend with open arms. It will free them from the nuts-and-bolts detail of the two issues. This will give them time to concentrate on equally important issues such as modelling how much the overhaul will cost, and what kind of data they will want to extract from their systems when the upgrade is completed.

Alliance & Leicester: Banking on a cheap fix

In his 1997 interim report, Alliance & Leicester finance director Richard Pym disclosed that the cost of the bank’s millennium fix would be between #30m and #40m. This figure compares to NatWest Bank’s reported budget of #100m and Abbey National’s #75m.

Pym does not take board-level responsibility for the group-wide system overhaul. The project, which is the bank’s top IT priority, is in the hands of group risk director, Bryan Cassidy. In February, Cassidy also took on a similar responsibility for introducing euro-handling capabilities.

The Alliance & Leicester’s project team conducted a joint impact assessment for Emu and the year 2000. When it established the size and scale of the likely problems, and the resources required to tackle them, the bank concluded that it would have to sacrifice most of its project development plans to tackle the two threats to its IT installations. To help free up resources, the company made the decision to outsource extraneous activities such as cheque-processing.

Cassidy says the bank has now completed its compliance analysis, which included reports from IT and financial services suppliers. Responsibility for carrying out upgrades to different systems has been parcelled out around different parts of the organisation.

The year 2000 action plan includes a company-wide approach to testing to ensure systems are millennium-compliant, plus contingency plans in the event of failures. “We’re planning to make sure there won’t be any, but it is sensible to have a fall-back,” says Cassidy.

“Now that people are beginning to open up the patient and see what surgery is needed, we’ll get a better feel for the total cost. But I don’t think the year 2000 figure will change much.”

The company’s Emu preparations are not as far advanced as the year 2000, which, according to Cassidy, “is probably the same for most financial services companies”. In common with other analysts, Cassidy believes that Emu will be a larger and more expensive conversion project than the year 2000.

“But where the year 2000 is just an irritant and a drain off the bottom line, Emu probably presents more opportunities,” says Cassidy. Peter Clarke, group director of finance projects at the Alliance & Leicester, explains that the impact assessment for Emu was not concerned with the argument over whether Britain would be in or out.

“We have to do it as we are all engaged in cross-border payments,” Clarke continues. “Banks are haunted by their legacy systems and trying to get them to talk to each other.” The ultimate solution at Alliance & Leicester involves converting financial ledgers and human resources functions to an integrated set of group systems based around Oracle applications running on Sequent Numa-Cube servers.

The Oracle software was selected partly for its flexibility, which the bank’s systems team decided would help speed the implementation projects. But Clarke also explains: “We are seeking to minimise customistation. You soon realise it solves one problem, but creates another. We’re concentrating on getting the systems in as planned, and then we’ll look forward from there.”

Alliance & Leicester’s upgrade strategy extends to 4,500 desktop PCs – over half of which will probably be replaced over the next 12 months.

“Some can be made compliant, but by the time you’ve done it, it would be cheaper to buy a new machine,” comments group risk management director Cassidy.

“Every system we’ve opened up so far has required some work to make it year 2000-compliant. For example, the supplier of existing equipment in the bank’s call centres said that it would fall over at the millennium and could not be fixed,” he continues.

As with its PCs, the millennium and Emu have accelerated the replacement of old technology at Alliance & Leicester. The man responsible for the two projects admits that they have caused the organisation some anguish, but emphasises how crucial they are to the company’s future: “The call centre systems are essential for our telephone banking clients, in the same way that people will expect ATMs to give them money.

If a Delta or credit card didn’t work, we would have to cope with more than the clients’ embarrassment. They would not be able to transact their business.”

John Stokdyk is IT journalist for Accountancy Age.

Technical check: Emu

Within the financial community, the significance of the single currency is reasonably well understood. Even if Britain remains outside Emu, companies will need to be able to cope with an extra currency if they trade with the euro zone. And the Chancellor of the Exchequer has gone on record advising companies to prepare for entry “when it is prudent to do so”.

Although Britain remains undecided about when to enter, the commitment of multinational firms such as Philips and IBM to trade in euros from next January will force many of their suppliers to equip themselves with compatible systems in time for the first wave. But on the vendor side, no company has been able to write a system with euro functionality. The European Commission has laid down basic requirements for handling the euro within financial IT systems: figures should be rounded to six significant figures and conversions between participating currencies will have to be carried out according to a process known as ‘triangulation’. Each member currency will have a conversion index (to six significant figures) to the euro. To translate francs into deutschemarks will involve multiplying the French franc figure by its euro index, and then converting that figure from euros into DM.

But under the European principle of subsidiarity, the specific national requirements will be determined by each country’s legislature. The same flexibility applies when countries such as Britain decide to join Emu. The first wave of Emu members is due to be decided in May and the British Business and Accountancy Software Developers Association (BASDA) anticipates publishing a technical specification for Emu-compliant systems by June.

This will leave just under six months for the software industry to deliver working code before euro trading begins on 1 January 1999. Leading European software houses – notably SAP – are writing what they can into their software and leaving ‘hooks’ to which they can connect the final calculation routines when the statutory requirements are set.

Technical check: Year 2000

When the first business applications were written, magnetic storage and random access memory were so limited that programmers used every trick they could to squeeze their code onto their machines. This included using just two digits to denote the year – as in DD/MM/YY.

The world is now awash with computer memory, but millions of systems, including the majority of PCs currently in use, bear the two-digit date legacy.

The BIOS control chip in most PCs has a DD/MM/YY clock. It can be changed to 23:59:59 on 31/12/99 manually at any time, and the PC will show the change to 01/01/00. But once a machine with an old BIOS processor is turned off, it will be confused by the change and revert to 01/04/81 – the birthday of Microsoft’s PC operating system, MS-DOS. (Only try this test on non-critical machines unless you are prepared to endure an early test run of millennium meltdown).

The millennium bug affects application software as well as hardware. Programs within your business may refer to other systems across a network, or extract data from legacy databases. They, too, could be thrown by 00 dates unless the code has been upgraded for four figures, or equipped with routines telling it to interpret years ending 00, 01 and so on as being in the 21st century. Reports of electronic point of sales systems rejecting credit cards expiring after 01/00 are common.

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