Nortel has entered into an agreement with IBM to jointly develop networking products for the telecommunications industry. The agreement, signed Thursday, will initially focus on the development of carrier-grade servers for communications providers that will be based on IBM's BladeCenter server design.

The two companies have established a 30-person joint development center in Research Triangle Park, N.C., but spokesmen from both IBM and Nortel were unable to provide many details on the project, which IBM Business Consulting Services Partner Steve Hasselmann characterized as a "strategic alliance."

In addition to the BladeCenter servers, IBM plans to provide the engineering and technical services to help Nortel develop a wide range of products for multimedia services, voice over IP and wired and wireless broadband services, Hasselmann said.

Nortel, in Brampton, Ontario, expects the deal to reduce its research and development costs, the company said in a statement.

At present, Nortel spends approximately 15% to 20% of its annual revenue on research and development, according to Ken Pecot, vice president of corporate strategy and development at Nortel. This means that the company's R&D spending during 2004 was between $1.5 billion and $2 billion.

Based on these figures, it is possible that the deal eventually could generate as much as $1 billion per year for IBM, should Nortel decide to hand over a significant portion of its product design to IBM, according to Lance Travis, vice president of outsourcing strategies at AMR Research. The deal may even extend to consulting, he said.

"This represents, for IBM, a potentially large new market of outsourcing services," Travis said. "This isn't just IBM supplying their technical expertise to Nortel. It's also IBM supplying their (business) expertise around product development."

The IDG News Service is a Network World affiliate.