IBM lands $2 billion Boeing deal

Boeing extends its relationship with Big Blue, giving it a broad five-year outsourcing contract.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
2 min read
Boeing extended its computing relationship with IBM today by awarding Big Blue a five-year outsourcing contract with an estimated value of $2 billion.

Services represent one of IBM's most significant sources of revenue and profits. Outsourcing and service contracts currently account for more than 20 percent of the company's revenues. The extended international presence required under some of these contracts additionally means that the company enjoys advantages in this field that can't easily be replicated.

The outsourcing industry is also growing rapidly.

"Hardware and software companies have to go in the direction of more services or they will be left behind," said Stephen McClelland, services analyst at Merrill Lynch. "It is an important aspect for IBM in supporting their hardware and software."

Under the contract, IBM's Global Services division will assume control over data centers in Kansas, Missouri, California, Philadelphia, and Arizona for five years. In addition, IBM will provide telephone, voicemail, video conferencing, and other telecommunications functions for all of Boeing. IBM's duties include running operations as well as performing maintenance.

The contract lasts five years and will bring an estimated $2 billion in revenue to IBM. The contract supplements have grown out of an existing outsourcing contract between IBM and McDonnell Douglas, which Boeing acquired in 1997. Substantial responsibilities under the contract pertain to facilities acquired form McDonnell Douglas.

IBM is by no means an exclusive supplier to Boeing. The company also works with Dell.

IBM's management has consistently said that large outsourcing contracts will increasingly play a large part in the company's strategy. Although gross margins generally have been lower on services than hardware, revenue for services has been growing faster.

Recently, IBM admitted that it is trying to sell its Global Network, a globe-spanning communications infrastructure that it is part of the Global Services division. The company, however, was adamant that it was not selling the services component, just the network's physical plant.

McClelland, among other analysts, see services as one of the strong opportunities for growth for computing giants. Others, however, such as Kim Brown of Dataquest, like to point out that the quest for service revenues generally come from companies that aren't doing as well in the hardware arena.

Dell, for instance, has yet to make a big push into providing technical manpower and continues to see its profits grow.