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11/22/2004
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Honeywell Outsources Chip Design to IBM

The 10-year deal is a major win for IBM's young Engineering & Technical Services unit.

Aerospace company Honeywell International Inc. says it has farmed out the design and engineering of computer chips, networking gear, and other IT components for its line of defense systems to IBM under a 10-year deal that IBM says is worth hundreds of millions of dollars. The agreement was disclosed Monday.

Under the deal, IBM will create variants of its Power Architecture microchip technology, as well as custom networking equipment, for Honeywell. Honeywell, in turn, will incorporate the designs into products aimed at meeting the Department of Defense's need for networked weapons systems that can communicate across battlefields in real time.

IBM will fulfill the contract through its Engineering & Technology Services unit, which it launched last year to provide custom engineering services for commercial customers. The unit was created as part of a larger push by IBM into what it calls business-transformation services, a mix of consulting and outsourcing offerings aimed at reengineering customers' business processes to make them more efficient and create space for innovation.

Some observers believe IBM could see big growth in the market for custom-chip design and other engineering services. "There is an enormous amount of activity that falls into the category of engineering that is routine and susceptible to economies of scale," says Mark Stahlman, an analyst at Caris & Co. In its recently concluded third quarter, IBM said business-transformation services, which includes engineering and technology services, grew 46% year over-year to $2.1 billion.

Stahlman says IBM's deal with Honeywell could also give it a bigger chunk of defense spending--expected to increase during President Bush's second term. It's an opportunity that other IT services companies are also looking to tap into. Earlier this month, Hewlett-Packard and Lockheed Martin Corp. said they would team up to offer a range of IT services to the government, defense, and security markets. Under the plan, revealed Nov. 3, HP and Lockheed Martin said they would pursue contracts in enterprise logistics, defense systems integration, and intelligence gathering for the United States and foreign governments.

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