An HRMS, or human resources management system, is a suite of software applications used tomanage human resources and related processes throughout the employee lifecycle. An HRMSenables a company to fully understand its workforce while staying compliant with changingtax laws and labor regulations.
HR leaders and staff are the primary users, given that they run day-to-day workforceoperations and are responsible for compliance and performance reporting. However, HRisn’tthe only department that benefits. Companies can empower managers and employees withself-service for common tasks—an important selling point for younger hires. Executivescanuse an HRMS to generate data on workforce trends and their business implications.
And given that HR-related costs are some of the largest expenses incurred by a company, HRMSintegration with the accounting system is invaluable for finance teams. Leading providerswill go beyond basic accounting to help a company wring more financial insights out of HRdata.
Video: What is HRMS?
HRIS vs HRMS
You may hear the term “HRIS,” an acronym for human resources information system,usedinterchangeably with HRMS. The roots of that stem from the 1980s, when IT departments werecommonly known as management information system (MIS) departments. When HR information andprocesses became computerized, a derivative of MIS—HRIS—was born.
A core HRIS function was electronic recording and management of employee records. Thus, HRISis the acronym many HR pros use to describe when human resources records, processes andreporting become electronic through the use of software.
As technology evolved and the system expanded beyond keeping employee records, HRIS becameknown as HRMS. Today, the terms are still used synonymously to describe the software systemsthat record employee information and automate HR processes at a company.
History of HRMS
In the 1970s, as companies looked to automate management of their people, payroll became thefirst HRMS function to be computerized. But it took mainframe technology to calculate aworker’s earnings, withhold deductions, print a paper check and track payrollliabilities.It wouldn’t be until the early 2000s, with widespread adoption of direct deposit andemployee self-service, that the payroll process became wholly electronic.
PeopleSoft(opens in new tab)was among the first to pioneer a more complete HRMS system in the late 1980s. In addition topayroll, it offered employee record management, recruiting, time and attendance, benefitsadministration, compensation, compliance reporting and other features to help HRprofessionals automate more of the employee lifecycle and make better workforce decisions.
The rise of the internet in the late 1990s brought the benefits of automation to even more HRprocesses. For example, paper-based help-wanted ads were replaced by electronic job boards,giving recruiters and candidates new ways to connect. By the 2010s, cloud technology wasmainstream—now, HR teams at all-size companies could afford a suite of applicationswithoutinvesting in expensive computer hardware or IT staff to operate and maintain the system.
What’s next?
2020 and beyond promises even more HRMS innovation. Machine learning and predictive analyticsare built in to many current systems, and the advent of true artificial intelligence willhelp companies anticipate future skills requirements, detect workforce trends and matchbest-fit candidates to open positions faster.
Why HRMS is important
While HR expenditures, especially office space, arein flux now given shifts to a work-from-home model, companies must still accuratelycalculate labor costs to keep revenue per employee KPIs current. Joseph Hadzima, a senior lecturer at the MIT Sloane School of Management,estimates(opens in new tab) that base pay plusemployment taxes and benefits typically add up to 1.25to 1.4 times annual salary. Thus, a $50,000 per year worker might actually cost $62,500 to$70,000, not including real estate and equipment, like PCs and phones.
Moreover, companies with overstretched human resources departments should be rolling outself-service capabilities. There’s no reason for an HR specialist to spend timeassisting amanager with routine updates to hours worked, for example, or helping employees access formslike W-2s.
Fortunately, accurate financial data reporting and secure self-service are just two benefitsof a modern human resources management system.
Functions of an HRMS
When considering which HRMS is right for your company, it’s helpful to think in termsoffunctional components. Generally, modern systems cover seven areas, with varying levels offocus.
Candidate management: Relates to employment offers to candidates and how youpromote your brand to both the outside world and current employees who may wish to apply forinternal jobs or make referrals. Critical for companies for which the candidate experienceis a primary concern—from applying to resume management to interview scheduling tomakingoffers, all the way through onboarding.
Employee engagement: People who are more engaged tend to producehigher-quality work and more fully adopt the company’s values and execute its vision,so howan employee connects with leadership and colleagues is important. Often, the HRMS is theroute to complete a training course, acquire a new skill, develop a career path, gainrecognition or become a mentor.
Employee management: There’s a reason this function is often referredto as“core HR.” Delivers a central portal to support analysis, reporting andcomplianceprocesses. It’s where you structure your workforce into organizational units, likedepartments or locations; define reporting relationships between managers and employees; andalign payroll to accounting cost centers. It’s here where personal information isrecordedand maintained, and this function is the cornerstone of efforts to offer employeeself-service, maximize reporting and improve HR service delivery.
Optimization: Gleaning information from the HRMS to develop a vision for thefuture workforce is a primary selling point. It’s also the least-utilized function ofatypical HRMS. The real value of this function usually comes to the fore with a merger oracquisition, sharp economic swings in either direction or when executives exit. Companiesthat take a proactive approach to optimizing the workforce are more resilient to change,have higher retention of top talent and better employee engagement.
Payroll: This is also a primary function of the HRMS—calculatingearningsfrom gross to net or net to gross and withholding individual deductions and issuing paymentscan be made just as routine as paying the rent. Payroll functions comprise benefit electionsand both employee and employer costs. Full-service payroll solutions also automate taxfiling and deposits. Self-service functions allow employees to make changes to electivedeductions, direct deposit accounts and tax withholdings and retrieve copies of earningstatements without HR assistance.
Workforce management: This is where HR teams track employee development,manager evaluations and disciplinary actions; record time and attendance; and ensure thecompany is providing a healthy and safe work environment. This is also where compensationplanning, performance management, learning and incident recording functions reside. HR candevelop timesheet structures, overtime rules, time-off policies and approval chains in waythat maximizes automation, control and efficiency. The employee performance review process,complete with goal management, is set up in this function as well.
Contingent workforce management: Related to primary workforce management andcritical for companies where not every employee is full-time. Contractors, consultants,interns and temporary employees provide specialized skills, support local communityinitiatives or university programs and handle spikes in demand for labor. The HRMS does notwholly manage these relationships because these employees are not always on the payroll andare usually not eligible for benefits; but the work they do contributes to company success,and it’s important to track how many contingent employees are on board at any giventime andthe total costs.
Once you have a clear understanding of which functions are most important, it’s time todiginto specific features.
HRMS Features
As with broad functionality, HRMS feature sets can vary widely from provider to provider, andcobbling together multiple products may limit the overall system. HR, IT, finance and otherstakeholders should carefully assess which of these HRMS features are must-haves for thecompany.
Benefits administration: Helps HR professionals develop plans, configureeligibility rules and make payments or deposits to benefits providers. Also offersself-service open enrollment and integrates benefit costs with accounting.
Centralized employee records: Provides a single repository where allemployee records are stored, updated and maintained. Allows for better reporting and lowersthe costs of compliance and preparing for audits.
Learning management: These features are designed to help employees acquireor develop skills through course administration, course and curriculum development, testingand certifications. Also enables companies to roll out and track required compliancetraining.
Reporting and analytics: Delivers the ability to run operational reports totrack HR information, complete compliance reporting, develop key performance indicators(KPIs) to measure HR process performance and embed HR metrics into financial dashboards forcompany-wide analysis, planning and decision-making. Also look for the ability to createad-hoc reports.
Rewards: Calculate salaries, hourly wages, variable payments for bonuses,overtime, sales commissions, shift differentials and merit increases while withholdingregulatory and elective deductions, resulting in accurate net payments to employees atregular intervals. Benefits, like matching retirement fund contributions or mobile phonereimbursem*nts, are sometimes included in this feature set.
Talent acquisition: Recruiters are able to build career pages on the companywebsite and intranet, create job requisitions and descriptions, manage positions, integrateopen positions with job boards, manage resumes, track applicants through the recruitingprocess, extend job offers, perform background checks, administer pre-employment screeningsand create job application forms, before handing new hires off to a generalist or the hiringmanager to begin onboarding.
Talent management: Enables HR professionals to develop and evaluateemployees via performance reviews, goal management, and competency and skills testadministration.
Time and attendance: Delivers the ability to process time-off requests andmanage time-off balances, employee scheduling and absence management and enables timecardsto be integrated with payroll and projects.
User interface: Because an HRMS can be opened to the entire workforce, auser-friendly interface is critical. Today’s systems feature employee and managerself-service, mobile apps, localization, personalized dashboards, workflow automation,role-based access controls and notifications to keep employees engaged and inquiries intothe HR or IT departments to a minimum.
Workforce planning: Provides the ability to plan and budget for workforcecosts and measure against actual outlays for both current and future scenarios. May also beused to identify skill gaps, create succession plans and prioritize recruitment efforts.
Additional features may be found in specialized HRMSs, and not every company needs a fullyloaded system. If you decide to use multiple providers to form the HRMS, ensure all theproducts include an open architecture to allow for bi-directional data exchange, neededintegrations and file uploads across the system. Using a single provider for an HRMS reducesthe need for one-off integrations, which can be expensive, complex and difficult to secureand update.
So far, we’ve talked features and functionality. But those who need to persuadeleadershipthat an HRMS is a smart buy need to prepare for a higher-level business ROI discussion.
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Benefits of an HRMS
The fundamental payoff of an HRMS is having all your workforce information in a centralrepository. That lowers compliance risks, provides a rich data set to informdecision-making, helps keep employees engaged and makes HR professionals more productive andtheir processes more efficient.
Let’s dig into the top five business benefits of an HRMS.
Better, deeper insights: Without an HRMS, employees and managers create datain various places, from spreadsheets to expense apps to paper records, making it impossibleto gain a comprehensive view of workforce costs. With an HRMS, all data is in asingle bucket, with higher integrity. That enables better, faster decision-making.It’s alsopivotal to a workforce planning andanalytics initiative, where a company assesses its current workforce and comparesthat reality with future needs as determined by business objectives. Some key benefits hereare the ability to identify and address skills gaps before they hurt productivity, codifysuccession plans and keep a handle on labor costs by analyzing how overtime or double timepayments affect financial performance.
With an HRMS, HR teams can also spot early indicators of problems. For example, ifhigh-performing employees in one department leave at a higher-than-normal rate, that might signal a toxicmanager. An HRMS can connect dots and help identify at-risk employees.
Improved employee engagement: An HRMS is invaluable in developing andretaining talent—something HR leaders are passionate about. Within an HRMS, HR cancreatetraining curriculums, personalize learning plans and career paths and set up mentorships.
In fact, Harvard Business Review suggests that skills development(opens in new tab) is of primeimportance to younger employees and specifically suggests a mentoring program focused onsharing expertise. Gen Z and Millennial workers also expect to be asked, on a regular basis,about their experiences. An HRMS can both match senior people in one department or geographywith those who can benefit from a mentoring relationship, conducted virtually, and deliverand tabulate employee satisfaction and engagement surveys.
All these development activities are then tracked in the HRMS to recognize developmentmilestones. That helps keep employees on track and loyal to the company.
Process efficiency & a culture of self-service: Responding to inquiriesor administering large programs, like benefits enrollment or performance reviews, can takeup to 40% of an HR professional’s time each week—and in many cases, individualswould bemore than happy to do that work themselves. Within an HRMS, HR can set up a knowledgerepository so people can find answers to frequently asked questions, and employees andmanagers can securely access their own records, enabling HR to focus on more value-addedservices.
In addition, HR processes that require multiple levels of approval, like processingtimecards, job requisitions and time-off requests, can be major time sucks. An HRMS providesapproval workflows for automating these and other processes so approvers are notified whenit’s their turn to approve (or reject). That can reduce processing time by more than50% andimprove accuracy.
Lower back-end overhead: From an IT and capital-spending POV, thecentralized nature of an HRMS—especially one sold in a fully cloud-based,software-as-a-service model—requires less hardware, data center space and IT anddevelopmentstaff resources for maintenance, support and training. This rationalizes IT expenditures forHR technology, requires fewer help desk staff and generally improves the satisfaction offull-time users of an HRMS, the HR team itself.
Faster recruiting: Attracting top talent and building your company’sreputation as “the place everyone wants to work” is another area HR pros arepassionateabout. The candidate experience, however, has been largely ignored because it’sdifficult togain insight into the job search process when postings happen outside of the company. AnHRMS solves this problem by connecting recruiters and candidates electronically through jobboards and mobile applications, making the process more enjoyable and efficient.
HR can even access candidate-pooling technology(opens in newtab) that accelerates passive recruiting whennew positions open up.
HRMS Security
Personal employee information requires a high level of protection to not only uphold privacyrights and meet compliance mandates, but to keep a positive culture. No other single pieceof information can sow discord like an employee learning what colleagues earn in similarroles, except possibly details of personnel actions becoming public.
Therefore, security features to protect access to sensitive employee information must be atthe top of your list of HRMS requirements.
While some industries, like health care or finance, and multi-national firms may havespecialized security requirements, all HRMS buyers should insist on:
Role-based access: HR staff require different rights than the rest of theworkforce, for good reason. Managers should be able to perform some tasks, individualemployees, others that relate to their own data. The HRMS should allow for all the roles youneed to manage constituencies.
System segmentation: The HRMS must be set up in such a way that certain datais accessible only by certain people or roles. Even within the HR department, some companieshave deployed security protocols to provide HR professionals with access to only thesegments of the workforce they serve. Often, executive payrolls are completely separatedinto unique accounting entities to protect that information.
Two-factor authentication: The widespread adoption of mobile phones makes itmuch easier to enable two-factor authentication technology for an added level of security.
Data encryption: All personnel data should be encrypted while at rest in theHRMS and in transit to the end user.
Password strength and reset policies: IT should be able to require certainpassword lengths and complexity and specify reset periods, as often as every 30 days, tohelp prevent unauthorized access to HRMS information.
A multi-pronged approach to HRMS security is something a potential investor orpurchaser or cybersecurity insuranceunderwriter will certainly look for, so build it in from the start.
Choosing an HRMS
The HRMS market is highly fragmented and can be overwhelming—some leading softwarereviewwebsites list over 700 companies that provide human resources management systems. Evaluatingall of them at a rate of two per day would take almost an entire year.
So, the first step is to separate potential providers into three groups:
ERP, or Enterprise Resource Planning, providers have integrations built intotheir other business applications, like accounting, CRM and procurement, so you get thebenefits of centralization, like having to input an employee record only once. With lowerintegration costs, the ERP model can provide a more consistent user experience, and you geta single security model—which is why 95% of businesses report process improvementsafter implementing an ERP.
The downside to the ERP category is that you won’t always find the depth of features anHRMSspecialist offers, so you may need to do some tasks, like running payroll, yourself. Userinterfaces can also be less user-friendly—more an accounting interface than aconsumer-gradesocial media experience.
Best of breed providers specialize in one to three areas (sometimes more) ofan HRMS. They offer more feature depth with less-complex user interfaces. The downside tobest of breed providers is they usually can’t provide an entire end-to-end HRMSsystem, andthere are add-on costs if you need integration with other systems, like accounting. Thesystem may not grow with your company, so ask about scalability.
Service providers offer a fully outsourced solution, where a company pays aprovider to run payroll, file taxes, administer benefits, keep the HR department compliantand send data into accounting so HR-related expenses can be included in financial reports.The service provider acts as your HR department, requiring fewer HR specialists to beemployed by your company.
Such services come at a higher monthly cost, can be difficult to leave, give you less controlover your HR data and processes and bring higher integration costs.
When to Purchase an HRMS
There’s no one-size-fits-all answer to the question of when to undertake an HRMSproject.Common events that trigger companies to purchase or upgrade include hiring a new HR leader,business expansion into other states or countries, a failed audit, the purchase of a newaccounting system or a merger or acquisition. Other drivers include new regulatory reportingrequirements, rapid growth or the need to better plan the future workforce.
HR, finance and IT leaders should be on the HRMS selection committee. Once the choices arenarrowed down, it’s a good idea to bring in a cross-section of employees who willactuallyuse the system to weigh in on the interface and functionality. These employees can then actas champions for the system once it’s rolled out.
Components of HRMS Success
Bottom line, here are our five keys to making the most of an HRMS purchase:
- If your IT ethos is forward-looking, explore systems that can use machine learning andpredictive analytics now and that have a roadmap to AI. The sooner you start feeding thesystem data, the better it can advise on future workforce needs and match candidates topositions.
- Different HRMSs excel in certain areas. Do you have a lot of turnover? Then lookcarefully at candidate management capabilities. Got a multi-state or -nationalworkforce? Make sure the system can handle complex payroll scenarios. Do you bring on alot of temps but wonder if it wouldn’t be smarter to hire? A contingent workforcemanagement function can help with analysis.
- You won’t sell an HRMS to budget holders by talking about cool features. What getsaproject funded are insights into how the system will help retain talent, free up HRstaff for value-added projects and minimize audit findings.
- Bring your security team or consultant into the selection process early, especially ifyou’re in a highly regulated industry like finance or health care.
- If you do decide to go the best-of-breed route, look for open APIs that makeintegration, if not simple, at least possible without a big, expensive developmentproject.
