Big Blue is negotiating with Britain's Cable & Wireless to help manage and maintain C&W's computer network and billing operation.
Sources said that a deal between the two companies has the potential to result in the largest contract outside the United States for IBM, the world's largest computer maker.
Roy Payne, head of corporate communications for Cable and Wireless, said that IBM's Global Services unit currently is the only company in negotiations with Cable and Wireless, but that, at this point, the parties are only measuring what is needed and what can be offered.
"Clearly, a modern communications network relies heavily on software support, and although an in-house IT team will have the range of skills, the question is whether they are the skills you need at one particular time given the fluctuating demands of our business," he said. "IBM can draw on its vast resources and allocate particular skills and support as demands change."
According to analysts, Cable & Wireless is known for adopting innovative ways to cut costs. "Outsourcing to IBM is clearly one way," said Alan Lyons, a telecommunications analyst at investment banking firm ABN AMRO Hoare Govett in London. "This is really a logical extension, to go from supplying the software that runs your system to supplying the personnel that runs the software."
Cable & Wireless said that it is negotiating to have its current in-house IT staff absorbed into IBM's staff.
"The priority is not cost savings, but efficiency," said Payne. "Our operations can improve if we pull on the resources of a much larger organization that specializes in software support, rather than doing it in-house."
Payne added that IBM will not be involved in any way in the operation of the Internet units C&W recently acquired for $1.75 billion from MCI Communications. (See related story)
Cable & Wireless was trading down nearly 1 percent at 35.75 on the New York Stock Exchange in midday trading. The stock has traded as high as 42.94 and as low as 22.5 during the past 52 weeks.
IBM shares were up nearly half a percent at 129.69. The stock has traded as high as 138.13 and as low as 88.66 during the past 52 weeks.
Cable & Wireless said its negotiations with Big Blue are likely to continue through September, and cautioned: "There is no guarantee that we will enter into an agreement."