IBM and Nortel, are joining forces to tackle new product development targeting telecommunications.

Nortel’s chief executive officer described the partnership as a way to cut research and development costs for the company while at the same time developing new products and services.

Nortel spends some $2 billion a year in research and development. It has been cutting costs, scope of operations, and workers since the telecom bust in 2000-1. It is still putting in place financial remedies designed to deal with a financial scandal that led to major changes in company leadership over the past year.

While specific financial terms of the deal were not disclosed, an analyst told Reuters that the deal could be a huge win for IBM.

“This has the potential to be very, very big,” Lance Travis of AMR Research, told the news service. “It could be worth up to $1 billion dollars a year to IBM.”

The announcement comes just a year after IBM and Nortel rival Cisco announced a major partnership targeting Voice over Internet Protocol and other convergent network technologies.

Media reports said products resulting from the joint effort would be sold under the Nortel brand. IBM will be paid fees for R&D efforts, The Herald-Sun of Durham reported.

The two companies said Thursday they would launch what is being called a “Joint Development Center” in RTP. Existing employees will be utilized in the effort, they added.

The center is described as the “first step” in a series of agreements under which IBM and Nortel will work together to develop new products and servers.

The first project will focus on so-called blade servers designed for high-end telecommunications applications. The IBM-Nortel teams will combine “IBM’s server technology and Nortel’s carrier-grade communications expertise”, the companies said in a statement.

IBM won 49.5 percent of the global blade server market in 2004, according to consulting firm IDC.

Nortel has some 3,00 workers in RTP –less than half it had at the height of the telecom boom in 2000. IBM has some 11,000 workers in the area, down from 13,000 following the sale of its personal computing division earlier this year.

“This agreement with IBM is a critical component of our strategy to partner for growth,” said Bill Owens, Nortel’s CEO, in a statement.. “Working with IBM, as one of their key partners, is a bold step forward in our efforts to transform our business by reaching an entirely new level of R&D collaboration while reducing our R&D costs, introducing products at a faster pace and serving a broad range of customers more rapidly.”

The partnership by IBM is part of its own restructuring as a company to offer more services.

“Together, we are working to reduce complexity and cost of service delivery while enabling innovation for a new set of on-demand services. This is at the core of what we do,” said Bill Zeitler of the IBM Systems and Technology Group.