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03:50 PM

Honeywell And IBM Join For Defense Design

10-year joint design deal is part of IBM's effort to sell wider range of services

IBM's efforts to become a power in the market for what it calls business-transformation services took two big steps forward last week. The company inked a 10-year outsourcing deal with Honeywell International Inc. to design technology for Honeywell's avionics and weapons subsystems business. And it acquired the insurance-claims-processing arm of a Toronto company, which will help IBM sell more-complex services to the insurance industry.

The Honeywell deal, worth hundreds of millions of dollars, according to IBM, is the biggest to date for IBM's engineering and technology-services unit, which the company launched last year to provide custom engineering services for commercial customers. The unit is part of IBM's business-transformation services group, which offers a mix of consulting and outsourcing offerings aimed at reengineering customers' business processes to make them more efficient and spur innovation. Revenue generated by the group grew 46% year over year to $2.1 billion in IBM's third quarter.

IBM's acquisition of the insurance-claims-processing arm of RBC Insurance Services is expected to close Dec. 31. Under the deal, financial terms of which weren't disclosed, about 700 Liberty Insurance Services Corp. staffers will transfer to IBM, though Liberty Insurance's operations will remain in Greenville, S.C., IBM says. Liberty Insurance also has offices in Kansas City, Mo. The deal calls for IBM to provide business and technology services to RBC Insurance.

Under the Honeywell contract, IBM will create variants of its PowerPC technology, as well as custom networking equipment, for Honeywell avionics products such as on-board radar and targeting systems. Honeywell will incorporate the designs into products aimed at meeting the Department of Defense's growing need for networked weapons systems that communicate across battlefields in real time. Honeywell will work with IBM to adapt IBM's PowerPC microprocessors to meet the performance required by military and space vehicles.

IBM and Honeywell staff will work as a virtual design team, says Ed Wheeler, VP and general manager of Honeywell's defense and space electronic systems group

IBM and Honeywell staff will work as a virtual design team, Honeywell VP Wheeler says.
Honeywell executives believe the deal provides the economic advantage of buying a mass-produced chip like the PowerPC without sacrificing performance parameters set by the Defense Department and its military contractors. Honeywell engineers will work directly with IBM engineers to tailor processor subsystems, such as input/output channels, for Honeywell's needs. "Our two teams will be working as a virtual design house," says Ed Wheeler, VP and general manager of Honeywell's defense and space electronic systems group.

IBM and Honeywell teams will develop, among other things, a PowerPC architecture that can power weapons-guidance systems and can run at the extreme temperatures inside a fighter aircraft, Wheeler says. They'll take products that work at lower temperatures and move them into "demanding environments," Wheeler says.

IBM could see big growth in the market for custom-chip design and other engineering services. "There's an enormous amount of activity that falls into the category of engineering that's routine and susceptible to economies of scale," says Mark Stahlman, an analyst at equities research firm Caris & Co.

IBM's deal with Honeywell also could give it a bigger chunk of defense spending, expected to increase during President Bush's second term, Stahlman says. Earlier this month, Hewlett-Packard and Lockheed Martin Corp. said they would team to offer a range of IT services to the government, defense, and security markets, pursuing contracts in enterprise logistics, defense systems integration, and intelligence gathering for the United States and foreign governments.

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