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IBM Closing In on Services Deal With P&G

Big Blue is poised to take over employee services for Procter & Gamble.

IBM (IBM) - Get Report is close to landing an outsourcing deal with Procter & Gamble (PG) - Get Report believed by analysts to be worth $400 million to $500 million.

IBM on Thursday confirmed that it now has the exclusive right to negotiate with P&G for the right to take over much of the consumer giant's employee-services operation. IBM spokesman James Sciales said that if IBM Global Services closes the deal, about 700 P&G employees would move to Big Blue.

Sciales added that IBM hopes to complete negotiations with P&G and sign a formal, long-term strategic services agreement in the next few weeks.

Sciales would not discuss the size of the deal, or comment on what other companies had been competing for it, but industry sources said that

Hewlett-Packard

(HPQ) - Get Report

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, which several months ago won a $3 billion infrastructure deal with P&G, was beaten out by IBM. H-P officials denied that, saying their company did not submit a proposal for the outsourcing deal.

Outsourcing is nothing new, of course, but the P&G deal does exemplify a new trend: farming out not just back-office IT services but business processes. In fact, the trend already has its own buzzword: business-process outsourcing, or BPO.

Analysts say that BPO represents a significant opportunity to move into a high-margin area. The fact that IBM is likely to win the P&G deal may be less significant than the fact that its rival did not -- whether H-P dropped out of the running early or simply chose not to compete. In an era of ever-shrinking hardware and even software margins, services are becoming key.

"We believe traditional IT (data center) outsourcing to be among the most mature, capital-intensive and low-margin segments within the portfolio of outsourcing services offered by major firms," Merrill Lynch analyst Steve Milunovich wrote recently. IBM, he said, "is repositioning its services portfolio (and its aggregate business mix) toward higher-margin segments with prospects for lasting differentiation."

In the same note, Milunovich noted that the earlier P&G deal, though lower margin, was a "coup" for H-P, putting the company in the big leagues of services providers.

Merrill Lynch has investment banking relationships with IBM and H-P.

In recent trading, IBM was off 44 cents, less than 1%, to $81.56, while H-P was up 18 cents, less than 1% to $19.70.