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The Year 2000 issue relates to the way dates have traditionally been stored and used in computing systems. To conserve expensive memory space, years were stored as two digits, so that the year 2000 will appear in many computing systems as "00". Many systems and computers will interpret "00" as the year 1900 instead of the year 2000. This could create difficulties in performing certain computing functions or potentially cause system failures. This in turn could result in miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other normal business activities. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on, or after January 1, 2000.
BCE Inc.'s subsidiary and associated companies (the "BCE Group companies") have established Year 2000 programs with the objective of seeking to ensure that all aspects of their operations are being addressed to meet the Year 2000 issue. The following discussion reviews the impact of the Year 2000 issue on BCE's two principal business segments, namely, Canadian Telecommunications and Nortel Networks.
Canadian Telecommunications
The practical consequences of the Year 2000 issue are a significant risk and challenge to BCE's Canadian telecommunications companies such as Bell Canada because the nature of their business is highly dependent on complex systems and technology which have date-sensitive aspects and a significant portion of their software must be modified or replaced. The Year 2000 issue could impact across most of their operations including the network (both the BCE Group companies' network and that shared with their business partners), the products and services provided to customers and their own internal systems and support activities. For example, network switching equipment is highly dependent on date-sensitive software programs that assist with the routing, reporting and management of telephone calls. A wide range of network management systems is also highly dependent on date-related functions. Bell Canada has several hundred information systems (e.g., call centre management systems, ordering and provisioning systems, repair reporting and management systems, and billing systems) which depend on date functionality to properly transact business affairs. Many products and services, as well as their supporting elements (e.g., voice mail), are also dependent on date-related functionality.
Bell Canada
A Year 2000 Program Management Office (PMO) was established in 1997 with the mandate to minimize the impact of the Year 2000 issue on Bell Canada's operations. The Year 2000 PMO has the responsibility to ensure that all aspects of Bell Canada's operations are being addressed to meet the Year 2000 issue. Bell Canada and the other Stentor Operating Companies have also set up a National Year 2000 Program Management Office (PMO). The Stentor Year 2000 PMO has developed a Year 2000 action plan to address the continued functionality of nationally delivered services up to, through, and beyond the year 2000.
A comprehensive governance process has been established to oversee Bell Canada's Year 2000 program. The Year 2000 program is reviewed monthly with the President of Bell Canada and other senior officers of the company. Updates are provided at least on a quarterly basis to the Bell Canada Board of Directors. In addition and in collaboration with the Stentor Year 2000 PMO, the Stentor National Year 2000 program is reviewed monthly with the Board of Directors of Stentor Canadian Network Management ("SCNM").
At the outset of Bell Canada's Year 2000 program, Bell Canada identified the following requirements in order to get ready for Year 2000: of approximately
As of December 31, 1998, Bell Canada had completed the majority of the effort required to convert or upgrade, test and deploy (i.e., put back into service) the network elements required to be Year 2000 compliant. In fact, all of the network elements comprising the Public Switched Telephone Network (PSTN) have been converted or upgraded, tested and put back into service as of December 31, 1998. However, as part of Bell Canada's ongoing Year 2000 test program, further testing of the PSTN will occur in 1999. Bell Canada anticipates that it will substantially complete the deployment of its network elements by approximately the end of March 1999. Similarly, as of December 31, 1998, the renovation, upgrade and code conversion of the majority of Bell Canada's information systems and information technology (IS/IT) was complete, with the mission critical components of these systems being in excess of 95% completed as of December 31, 1998. Each application is subject to an internal certification process and tested before it is put back into service. It is anticipated that all Bell Canada mission critical applications will be substantially complete by the end of March 1999 and that the national mission critical applications that Bell Canada uses in collaboration with its business partners will be substantially complete by the end of June 1999. Bell Canada further expects that the majority of its products and services will be Year 2000 ready by March 31, 1999, with substantially all products and services being targeted to be ready by approximately June 30, 1999. As to national products and services which Bell Canada offers in collaboration with its business partners, it is anticipated that the majority of those products will be ready by March 31, 1999, with substantially all products and services being targeted to be ready by approximately June 30, 1999.
Bell Canada has undertaken a detailed testing and internal certification program which seeks to ensure that each Bell Canada Year 2000 IS/IT project is reviewed and approved by the appropriate officers or other employees of Bell Canada. Each IS/IT application and network element is subject to a series of date related tests that seek to ensure that it will continue to work before and beyond the Year 2000. In addition, Bell Canada, in cooperation with the other Stentor Operating Companies, has begun to conduct national interoperability tests and will continue to do so in 1999. Bell Canada is also taking steps which seek to ensure that its mission critical and priority building systems, as well as the IS/IT systems that support the physical environment, are being prepared for the Year 2000.
Bell Canada performs reviews of its Year 2000 program on a regular basis. In addition, three specific reviews have been conducted by an independent third party, and further independent reviews of key aspects of Bell Canada's Year 2000 program may be conducted in the future. Although there are significant risks and uncertainties associated with a program of this magnitude, Bell Canada believes it will meet its overall schedule. However, a delay in any critical element of Bell Canada's Year 2000 program could materially impact Bell Canada's ability to meet its projected target dates and its ability to be ready by January 1, 2000. Some of these critical elements include the delivery of compliant products and services from Bell Canada's suppliers, delays in the conversion and deployment of critical network elements, and cross-impacts of Bell Canada's modernization program delays. Contingency plans would be invoked should any delay or failure be deemed to significantly jeopardize Bell Canada's operations. Bell Canada anticipates it will have substantially completed its development of contingency plans by the end of March 1999. The plans will be implemented and tested throughout the remainder of the year.
The risk and challenge of Bell Canada's Year 2000 program is amplified by the fact that many of Bell Canada's applications and systems interact with those of customers and other third parties which are beyond the control of Bell Canada but whose failure to make their systems Year 2000 compliant could materially impact Bell Canada. Bell Canada is highly dependent on many suppliers who provide Bell Canada with an extensive array of products and services critical to its operations.
Since January 1997, Bell Canada has instituted a comprehensive vendor management program, which seeks to ensure that the products and services it receives from its suppliers are or will be Year 2000 compliant. As of December 31, 1998, Bell Canada had completed its due diligence process with most of its suppliers and intends to continue its monitoring of its suppliers to seek to ensure that products and services will be Year 2000 compliant and that Year 2000 ready products will be delivered when promised. However, there can be no assurance that the products or systems of other companies which Bell Canada or its customers utilize or rely upon will be converted in a timely and effective manner, or that a failure to convert by another company or a conversion that is incompatible with Bell Canada's systems, would not have material adverse effects on Bell Canada or its customers.
Bell Canada also believes that the restructuring of the Stentor alliance will not materially affect its Year 2000 program. The Stentor alliance is evolving, but it is envisaged that SCNM will continue to be responsible for the Stentor National Year 2000 program.
Nortel Networks
The practical consequences of the Year 2000 issue are a significant risk and challenge to Nortel Networks. More specifically, the Year 2000 issue could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Nortel Networks' business operations, including, for example, its finance, human resources, manufacturing, and customer order management functions, make extensive use of information technology and, as such, are exposed to significant risk from the Year 2000 issue.
In 1994, Nortel Networks began a long-term program to deploy an enterprise backbone architecture to establish a common suite of business applications throughout Nortel Networks and its subsidiaries. The new applications are being deployed as Year 2000 ready, and for those business units relying on replacement of certain legacy applications as part of their Year 2000 strategy, they are expected to replace a number of legacy applications by the end of the second quarter of 1999. All business system applications not addressed by the enterprise backbone deployment, including vendor supplied applications, are expected to be made Year 2000 ready through Nortel Networks' Year 2000 Program.
In 1996, Nortel Networks initiated its Year 2000 Program and subsequently determined that it would be necessary to modify or replace significant portions of software so that business applications, computing environments and products would properly utilize Year 2000 dates before and beyond December 31, 1999. Nortel Networks' Year 2000 Program consists of a product program (the Product Program), an information services program (the IS Program) and a facilities program (the Facilities Program).
In September 1998, following the acquisition of Bay Networks, Nortel Networks commenced integration of Bay Networks' Year 2000 Program into Nortel Networks' overall Year 2000 Program.
The Product Program focuses on identifying and resolving Year 2000 issues relating to Nortel Networks' products and deploying solutions to customers. Through this program Nortel Networks has made or will make its current product offerings Year 2000 ready. In addition, Nortel Networks is providing an upgrade or migration path and other information to customers and distributors who have non-Year 2000 ready products. The Product Program consists of the following three major phases: Phase I (analysis, remediation and verification), Phase II (deployment) and Phase III (business continuity planning).
Nortel Networks estimates that Phase I of the Product Program was approximately 98% complete as at December 31, 1998 and the remaining activities are expected to be completed by the end of March 1999. Nortel Networks is also working with outside agencies, such as Bellcore, the United States government (GSA), the Telco Year 2000 Forum in the United States, Alliance for Telecommunications Industry Standards, and the Canadian Year 2000 Telecom Industry Forum, to support independent verification and interoperability testing of selected products. Phase II, deployment of product and product upgrades, has commenced and is expected to continue throughout 1999 at the request of Nortel Networks product users. Nortel Networks estimates that this phase will be substantially complete by mid-1999. Nortel Networks has initiated formal communications with its customers (except where Nortel Networks sells its products through distributors, in which case formal communications have been initiated primarily with such distributors). Customers and/or distributors are being notified of known risk areas and proposed remediation plans. Customers are being encouraged to arrange for deployment of Year 2000 ready products promptly to ensure the products will be deployed prior to the year 2000. Increased orders of Year 2000 ready products and product upgrades at the end of 1999 may overburden available installation resources. Phase III, business continuity planning, began for the Product Program in the third quarter of 1998 and is expected to be completed by the end of the second quarter of 1999. Thereafter, business continuity planning will be monitored and updated on an ongoing basis into the year 2000. Joint implementation of business continuity planning will be undertaken with customers as appropriate.
The IS Program addresses business applications and includes third-party/supplier assessment and joint venture activities related to Year 2000 readiness. The IS Program consists of the following three major phases: Phase I (assessment and validation - inventory of Year 2000 affected items, assessment of Year 2000 readiness, and prioritization of items determined to be material to Nortel Networks); Phase II (implementation and deployment - repair and/or replacement of items determined not to be Year 2000 ready, testing of all items that have been repaired or replaced or have been identified as Year 2000 ready but are considered to be material to Nortel Networks, and redeployment of tested items into Year 2000 ready operating environments); and Phase III (business continuity planning - planning to reduce the risk of business interruption to Nortel Networks resulting from potential Year 2000 issues).
Business applications are undergoing an assessment and are being remedied, retired, or replaced, as appropriate. Third-party supplied software is similarly being assessed, and has been or will be upgraded or replaced. Nortel Networks estimates that in respect of its business applications, Phases I and II activities were approximately 85% complete at December 31, 1998, and the remaining Phases I and II activities are on schedule to be completed by the end of the second quarter of 1999. Most of the Phases I and II activities carried over into 1999 are related to the deployment of applications which have been determined to be Year 2000 ready, and were not deployed in 1998 for various business reasons. These activities are scheduled to be completed by the end of the second quarter of 1999. Phase III, business continuity planning, began for the IS Program in the fourth quarter of 1998 and plans are expected to be in place by the end of the third quarter of 1999, at which point monitoring and execution of business continuity plans will be undertaken, as appropriate.
None of Nortel Networks' information technology (IT) projects have been delayed due to the implementation of the Year 2000 Program.
Third-party supplier relationships are being assessed to determine the potential for Year 2000 impact. These relationships include third-party suppliers that provide manufacturing materials, software applications, tools, outsourced services, telecommunications, and other infrastructure-related products and services required by Nortel Networks. Assessment activities include the identification and prioritization of critical suppliers, direct communications with suppliers regarding their plans and progress in addressing the Year 2000 issue relating to products and services supplied to Nortel Networks and/or their own internal operations, and specific assessment of direct interfaces between the third-party supplier and Nortel Networks. Formal communications between Nortel Networks and significant third-party suppliers are focused to determine the extent to which Nortel Networks is vulnerable to these third parties' potential failure to remedy their own Year 2000 issue. Where appropriate, Nortel Networks has or plans to execute Year 2000 compliance agreements with such parties. Detailed evaluations of the most critical third parties and their products or services have been initiated. Where appropriate, the results of such evaluations will initiate the development of business continuity plans. Business continuity planning commenced in the fourth quarter of 1998 and plans are expected to be in place by the end of the third quarter of 1999, at which point monitoring and execution of business continuity plans will be undertaken, as appropriate.
The Facilities Program encompasses the building infrastructure including environmental controls, security systems, fire systems and associated embedded systems that are used in the control or operation of all facilities operated by Nortel Networks. Also addressed under the Facilities Program are factory-based embedded systems used in the manufacture and testing of Nortel Networks products. The Facilities Program is on schedule, and it is expected that the repair and testing of equipment will be substantially completed by the end of the second quarter of 1999. Business continuity planning for the Facilities Program commenced in the third quarter of 1998 and plans are expected to be in place by the end of the third quarter of 1999, at which point monitoring and execution of such plans will be undertaken, as appropriate.
Business continuity planning, which commenced in the Product Program, IS Program and Facilities Program during the third and fourth quarters of 1998, has recently been coordinated under a central corporate Business Continuity Planning Program (the BCP Program). The governing objective of the BCP Program is to protect corporate resources in the face of a potential Year 2000 event, to continue the delivery of essential services to both internal and external customers, and to minimize the effects of the disruption on the operations of Nortel Networks' business. The planning process is based on an industry-accepted, process-focused approach, and the overall BCP Program has a scheduled completion date of the end of the third quarter 1999, with implementation monitoring and execution of business continuity plans occurring during the fourth quarter. Interim planning milestones have been established and the progress of the BCP Program is monitored on a regular basis. Some business continuity planning activities will be completed prior to the end of the third quarter in order to prepare for potential Year 2000-related events that could occur prior to such time.
In planning for the most reasonably likely worst-case scenarios, Nortel Networks has addressed all three programs which comprise its Year 2000 Program. Nortel Networks expects that its products will be ready for the Year 2000, and that its exposure lies with customers who are not aware or not willing to complete the required upgrades to make their Nortel Networks products Year 2000 ready. Nortel Networks' Product Program includes plans to place advertisements in trade journals, conduct seminars and dedicate a Web site to contact all possible customers that may possess non-Year 2000 ready products. Nortel Networks expects that its IT systems will be ready for the Year 2000, but that it may experience isolated incidences of non-compliance and potential outages with respect to IT infrastructure. Nortel Networks plans to allocate internal resources and retain dedicated consultants and vendor representatives to be ready to take action should these events occur. Business continuity planning for facilities is currently in process, and Nortel Networks is simultaneously putting the required resources in place to carry out those plans for key facilities. Critical business partners are being contacted to assess their readiness and appropriate business continuity plans will be developed by the end of the second quarter of 1999 to address potential business interruptions that may be experienced by such parties. It is a reasonably likely worst-case scenario that some of Nortel Networks' suppliers will experience business interruptions due to the Year 2000 issue. Business continuity planning to address key supplier relationships is currently underway. Although Nortel Networks values its established relationships with key suppliers, alternative products and/or services will be considered in situations where timely confirmation of Year 2000 readiness of products/services or suppliers cannot be established. If certain suppliers are unable to deliver products and/or services on a timely basis, due to their own Year 2000 issues, business continuity plans should assure a timely transition to an alternate supplier to provide the required products and/or services. Nortel Networks also recognizes the risks to its business if other key suppliers in utilities, communications, transportation, banking, and government are not ready for the Year 2000, and is developing business continuity plans to minimize the potential adverse impacts of these risks.
Costs associated with the Year 2000 issue
The BCE Group companies have used and will continue to use both internal and external resources to reprogram, or replace, and test their software for Year 2000 modifications. BCE's share of the BCE Group companies' total costs for the various Year 2000 projects are estimated at approximately
As of December 31, 1998, the BCE Group companies incurred
Outlook
While BCE Inc. believes that the BCE Group companies have appropriate plans in place, the Year 2000 issue is a unique event which raises unprecedented challenges and risks. BCE Inc. presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not completed on a timely basis, if any of the BCE Group companies' mission critical suppliers fails to deliver Year 2000 ready products and services, if products or systems of other companies which the BCE Group companies or their customers utilize or rely on are not converted in a timely and effective manner, or if there is a failure to convert by another company or a conversion that is incompatible with the BCE Group companies' systems, products and services, and if the BCE Group companies' contingency plans are ineffective, the Year 2000 issue could have a material adverse effect on the financial condition and results of the BCE Group companies.
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