All of this activity demonstrates a trait not commonly associated with large law firms: business foresight. However, most firms have viewed Y2K too narrowly and have focused far less attention on the affects of Y2K on themselves. In the brief framework of this Second Opinion piece, I have the challenging task of explaining these obvious and not so obvious impacts on law firms, with an emphasis on large, more technology dependent law firms. In short, Y2K will take its T.O.L.L. on many firms. The four categories of exposure facing law firms are Technology, Operations, Liquidity and Liability.
Technical Exposures
At the root of Y2K are the "00"s and the "99"s. There's nothing difficult or magical about the technical exposures. They exist in enough software applications and embedded systems that General Motors and AT&T are spending $1 Billion each. Law firms are not immune. In general large law firms utilize less-than-current technology and have (in keeping up with their clients) grown more dependent upon it. While not intending to disparage my audience or brethren (as an attorney an d Y2K consultant), law firms have reluctantly developed their IT departments commensurate with developing cutting edge practice areas such as intellectual property. This general resistance to technology correlates to Y2K remediation activity. It is no surprise that Gartner Group has identified the legal community as among the least prepared to handle Y2K from an internal systems perspective.
One example should suffice: In late 1997, the CIO of a top 50 law firm tried to convince me that there were no Y2K problems in the firm, specifically the network software. He proceeded to proudly demonstrate how the calendar application resident on the managing partner's desktop PC correctly displayed January, 2000 when scheduling a future appointment. For those not familiar with Y2K compliance issues, the displaying of the number "2000" is completely unrelated to the method of date processing. In the mind of this de facto Y2K project manager, the entire firm was therefore compliant. The fact that this was the extent of the testing for the entire firm concerned him not. Sufficed to say, this firm's anticipation of a lucrative liti gation practice may be in vein if their scheduling, conflicts database, central files, document production database and/or accounting systems fail to function properly.
Operational Exposures
Firm operations can be disrupted from numerous sources, not merely internal systems. Some obvious operational exposures include Westlaw, Lexis/Nexis, Sheppards, et al. Some less obvious include reproduction companies, court reporters, court systems, 401(k) plan administrators, payroll companies and even malpractice carriers themselves.
Perhaps at the bottom of most Y2K lists, but by no means a trivial exposure, is employee preparedness. Increasingly corporate and personal preparedness issues are converging as organizations realize that Y2K can impact individuals as well as businesse s. If employees have not prepared themselves and their families, Y2K disruptions could force employees to take leave in order to deal with personal matters such as dealing with their bank or credit card company or scrambling to obtain household necessiti es. The timing of this personnel shortage can be particularly problematic if contingency plans are triggered (assuming such plans have been written) that requires manual fail-safes. Most organizations neglect this issue out of fear of overreaction. Emp loyee awareness programs should not be apocalyptic, but clear, simple and helpful.
Liquidity Exposures
Anther significant Y2K threat to law firms is liquidity. This is because Y2K can affect all three key financial liquidity factors: revenue, expense and access to credit. Revenue will almost certainly be affected if Gartner Group's estimate of 20% bus iness failures due to Y2K is accurate, Ed Yardini's (chief economist, Deutche, Morgan, Grenfell) deflation prediction is accurate or if clients simply hoard cash to pay for (or out of fear of having to pay for) Y2K-related extra expenses.
Expenses will almost certainly be affected if manufacturer's statements of compliance prove incorrect, interoperability between applications was not a focus of the Y2K project or if emergency spending becomes necessary to compensate for supplier failur es. Several economists predict a credit crunch just prior to and lasting through 2000. As reserves are depleted from cash withdrawals, non-payment rates increase, and organizations simultaneously apply for additional credit, the banking community will n ecessarily react by limiting access to credit or, at a minimum, establishing less favorable terms and interest rates. While most law firms operate with existing lines of credit sufficient for client-related transactions and one or two month's payroll exp enses, this may prove to be insufficient. As well, many large law firms compensate partners on a quarterly basis, after profit is determined. These partners may feel the impact of Y2K directly and personally as the first two or three quarters of 2000 af fect their firms' liquidity.
Liability
All organizations face liability exposures because of
Y2K. Aside from the IT industry and health care, the
legal community faces perhaps the greatest liability
exposure. While the litigation teams appear fully
formed and prepared to assist their clie nts, other
practice areas lag behind. With the exception of a
handful of forward thinking attorneys, the legal
community has generally been slow to embrace Y2K.
Nearly every specialty is impacted. A few examples
should suffice: (1) the approval of an a cquisition
without sufficient due diligence into the Y2K-related
liability exposures of the target entity; (2) the
approval of SEC disclosure statements that do not
conform to SEC Y2K disclosure requirements; (3) the
negotiation of a commercial lease with out Y2K
assurances; (4) short-sighted insurance advice; and (5)
less-than-diligent direct Y2K client representation.
These exposures can be dramatically decreased by
utilizing low cost and efficient Y2K business audit
services available on the Internet s uch as
Benchmark2000 – (https://benchmark.consult2000.com).
Y2K may well be the next major area of litigation,
perhaps dwarfing asbestos, silicone implants, toxic
torts or tobacco. What the large law firms must
understand is that they are not immune. I was once
asked by an attendee of a conference for outside
counsels, "how can we convince our clients that
they truly have a Y2K problem and that they need to
retain our services?" To which I responded,
"look at your own firm's initiatives. If you
can't convince yourself, you will never convince your
clients."