An HRMS, or human resources management system, is a suite of software applications used to manage human resources and related processes throughout the employee lifecycle. An HRMS enables a company to fully understand its workforce while staying compliant with changing tax laws and labor regulations.

HR leaders and staff are the primary users, given that they run day-to-day workforce operations and are responsible for compliance and performance reporting. However, HR isn’t the only department that benefits. Companies can empower managers and employees with self-service for common tasks—an important selling point for younger hires. Executives can use 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, HRMS integration with the accounting system is invaluable for finance teams. Leading providers will go beyond basic accounting to help a company wring more financial insights out of HR data.

Video: What is HRMS?

HRIS vs HRMS

You may hear the term “HRIS,” an acronym for human resources information system, used interchangeably with HRMS. The roots of that stem from the 1980s, when IT departments were commonly known as management information system (MIS) departments. When HR information and processes became computerized, a derivative of MIS—HRIS—was born.

A core HRIS function was electronic recording and management of employee records. Thus, HRIS is the acronym many HR pros use to describe when human resources records, processes and reporting become electronic through the use of software.

As technology evolved and the system expanded beyond keeping employee records, HRIS became known as HRMS. Today, the terms are still used synonymously to describe the software systems that 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 the first HRMS function to be computerized. But it took mainframe technology to calculate a worker’s earnings, withhold deductions, print a paper check and track payroll liabilities. It wouldn’t be until the early 2000s, with widespread adoption of direct deposit and employee self-service, that the payroll process became wholly electronic.

PeopleSoft was among the first to pioneer a more complete HRMS system in the late 1980s. In addition to payroll, it offered employee record management, recruiting, time and attendance, benefits administration, compensation, compliance reporting and other features to help HR professionals 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 HR processes. 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 was mainstream—now, HR teams at all-size companies could afford a suite of applications without investing 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 analytics are built in to many current systems, and the advent of true artificial intelligence will help companies anticipate future skills requirements, detect workforce trends and match best-fit candidates to open positions faster.

Why HRMS is important

While HR expenditures, especially office space, are in flux now given shifts to a work-from-home model, companies must still accurately calculate labor costs to keep revenue per employee KPIs current. Joseph Hadzima, a senior lecturer at the MIT Sloane School of Management, estimates that base pay plus employment taxes and benefits typically add up to 1.25 to 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 out self-service capabilities. There’s no reason for an HR specialist to spend time assisting a manager with routine updates to hours worked, for example, or helping employees access forms like W-2s.

Fortunately, accurate financial data reporting and secure self-service are just two benefits of 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 terms of functional components. Generally, modern systems cover seven areas, with varying levels of focus.

Candidate management: Relates to employment offers to candidates and how you promote your brand to both the outside world and current employees who may wish to apply for internal jobs or make referrals. Critical for companies for which the candidate experience is a primary concern—from applying to resume management to interview scheduling to making offers, all the way through onboarding.

Employee engagement: People who are more engaged tend to produce higher-quality work and more fully adopt the company’s values and execute its vision, so how an employee connects with leadership and colleagues is important. Often, the HRMS is the route to complete a training course, acquire a new skill, develop a career path, gain recognition or become a mentor.

Employee management: There’s a reason this function is often referred to as “core HR.” Delivers a central portal to support analysis, reporting and compliance processes. It’s where you structure your workforce into organizational units, like departments or locations; define reporting relationships between managers and employees; and align payroll to accounting cost centers. It’s here where personal information is recorded and maintained, and this function is the cornerstone of efforts to offer employee self-service, maximize reporting and improve HR service delivery.

Optimization: Gleaning information from the HRMS to develop a vision for the future workforce is a primary selling point. It’s also the least-utilized function of a typical HRMS. The real value of this function usually comes to the fore with a merger or acquisition, sharp economic swings in either direction or when executives exit. Companies that 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—calculating earnings from gross to net or net to gross and withholding individual deductions and issuing payments can be made just as routine as paying the rent. Payroll functions comprise benefit elections and both employee and employer costs. Full-service payroll solutions also automate tax filing and deposits. Self-service functions allow employees to make changes to elective deductions, direct deposit accounts and tax withholdings and retrieve copies of earning statements without HR assistance.

Workforce management: This is where HR teams track employee development, manager evaluations and disciplinary actions; record time and attendance; and ensure the company is providing a healthy and safe work environment. This is also where compensation planning, performance management, learning and incident recording functions reside. HR can develop timesheet structures, overtime rules, time-off policies and approval chains in way that 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 and critical for companies where not every employee is full-time. Contractors, consultants, interns and temporary employees provide specialized skills, support local community initiatives or university programs and handle spikes in demand for labor. The HRMS does not wholly manage these relationships because these employees are not always on the payroll and are 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 given time and the total costs.

Once you have a clear understanding of which functions are most important, it’s time to dig into specific features.

HRMS Features

As with broad functionality, HRMS feature sets can vary widely from provider to provider, and cobbling together multiple products may limit the overall system. HR, IT, finance and other stakeholders should carefully assess which of these HRMS features are must-haves for the company.

Benefits administration: Helps HR professionals develop plans, configure eligibility rules and make payments or deposits to benefits providers. Also offers self-service open enrollment and integrates benefit costs with accounting.

Centralized employee records: Provides a single repository where all employee records are stored, updated and maintained. Allows for better reporting and lowers the costs of compliance and preparing for audits.

Learning management: These features are designed to help employees acquire or develop skills through course administration, course and curriculum development, testing and certifications. Also enables companies to roll out and track required compliance training.

Reporting and analytics: Delivers the ability to run operational reports to track HR information, complete compliance reporting, develop key performance indicators (KPIs) to measure HR process performance and embed HR metrics into financial dashboards for company-wide analysis, planning and decision-making. Also look for the ability to create ad-hoc reports.

Rewards: Calculate salaries, hourly wages, variable payments for bonuses, overtime, sales commissions, shift differentials and merit increases while withholding regulatory and elective deductions, resulting in accurate net payments to employees at regular intervals. Benefits, like matching retirement fund contributions or mobile phone reimbursements, are sometimes included in this feature set.

Talent acquisition: Recruiters are able to build career pages on the company website and intranet, create job requisitions and descriptions, manage positions, integrate open positions with job boards, manage resumes, track applicants through the recruiting process, extend job offers, perform background checks, administer pre-employment screenings and create job application forms, before handing new hires off to a generalist or the hiring manager to begin onboarding.

Talent management: Enables HR professionals to develop and evaluate employees via performance reviews, goal management, and competency and skills test administration.

Time and attendance: Delivers the ability to process time-off requests and manage time-off balances, employee scheduling and absence management and enables timecards to be integrated with payroll and projects.

User interface: Because an HRMS can be opened to the entire workforce, a user-friendly interface is critical. Today’s systems feature employee and manager self-service, mobile apps, localization, personalized dashboards, workflow automation, role-based access controls and notifications to keep employees engaged and inquiries into the HR or IT departments to a minimum.

Workforce planning: Provides the ability to plan and budget for workforce costs and measure against actual outlays for both current and future scenarios. May also be used 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 fully loaded system. If you decide to use multiple providers to form the HRMS, ensure all the products include an open architecture to allow for bi-directional data exchange, needed integrations and file uploads across the system. Using a single provider for an HRMS reduces the need for one-off integrations, which can be expensive, complex and difficult to secure and update.

So far, we’ve talked features and functionality. But those who need to persuade leadership that an HRMS is a smart buy need to prepare for a higher-level business ROI discussion.

Benefits of an HRMS

The fundamental payoff of an HRMS is having all your workforce information in a central repository. That lowers compliance risks, provides a rich data set to inform decision-making, helps keep employees engaged and makes HR professionals more productive and their 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 data in various places, from spreadsheets to expense apps to paper records, making it impossible to gain a comprehensive view of workforce costs. With an HRMS, all data is in a single bucket, with higher integrity. That enables better, faster decision-making. It’s also pivotal to a workforce planning and analytics initiative, where a company assesses its current workforce and compares that reality with future needs as determined by business objectives. Some key benefits here are the ability to identify and address skills gaps before they hurt productivity, codify succession plans and keep a handle on labor costs by analyzing how overtime or double time payments affect financial performance.

With an HRMS, HR teams can also spot early indicators of problems. For example, if high-performing employees in one department leave at a higher-than-normal rate, that might signal a toxic manager. An HRMS can connect dots and help identify at-risk employees.

Improved employee engagement: An HRMS is invaluable in developing and retaining talent—something HR leaders are passionate about. Within an HRMS, HR can create training curriculums, personalize learning plans and career paths and set up mentorships.

In fact, Harvard Business Review suggests that skills development is of prime importance to younger employees and specifically suggests a mentoring program focused on sharing 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 geography with those who can benefit from a mentoring relationship, conducted virtually, and deliver and tabulate employee satisfaction and engagement surveys.

All these development activities are then tracked in the HRMS to recognize development milestones. That helps keep employees on track and loyal to the company.

Process efficiency & a culture of self-service: Responding to inquiries or administering large programs, like benefits enrollment or performance reviews, can take up to 40% of an HR professional’s time each week—and in many cases, individuals would be more than happy to do that work themselves. Within an HRMS, HR can set up a knowledge repository so people can find answers to frequently asked questions, and employees and managers can securely access their own records, enabling HR to focus on more value-added services.

In addition, HR processes that require multiple levels of approval, like processing timecards, job requisitions and time-off requests, can be major time sucks. An HRMS provides approval workflows for automating these and other processes so approvers are notified when it’s their turn to approve (or reject). That can reduce processing time by more than 50% and improve accuracy.

Lower back-end overhead: From an IT and capital-spending POV, the centralized 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 and development staff resources for maintenance, support and training. This rationalizes IT expenditures for HR technology, requires fewer help desk staff and generally improves the satisfaction of full-time users of an HRMS, the HR team itself.

Faster recruiting: Attracting top talent and building your company’s reputation as “the place everyone wants to work” is another area HR pros are passionate about. The candidate experience, however, has been largely ignored because it’s difficult to gain insight into the job search process when postings happen outside of the company. An HRMS solves this problem by connecting recruiters and candidates electronically through job boards and mobile applications, making the process more enjoyable and efficient.

HR can even access candidate-pooling technology that accelerates passive recruiting when new positions open up.

HRMS Security

Personal employee information requires a high level of protection to not only uphold privacy rights and meet compliance mandates, but to keep a positive culture. No other single piece of information can sow discord like an employee learning what colleagues earn in similar roles, except possibly details of personnel actions becoming public.

Therefore, security features to protect access to sensitive employee information must be at the top of your list of HRMS requirements.

While some industries, like health care or finance, and multi-national firms may have specialized security requirements, all HRMS buyers should insist on:

Role-based access: HR staff require different rights than the rest of the workforce, for good reason. Managers should be able to perform some tasks, individual employees, others that relate to their own data. The HRMS should allow for all the roles you need to manage constituencies.

System segmentation: The HRMS must be set up in such a way that certain data is accessible only by certain people or roles. Even within the HR department, some companies have deployed security protocols to provide HR professionals with access to only the segments of the workforce they serve. Often, executive payrolls are completely separated into unique accounting entities to protect that information.

Two-factor authentication: The widespread adoption of mobile phones makes it much 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 the HRMS and in transit to the end user.

Password strength and reset policies: IT should be able to require certain password lengths and complexity and specify reset periods, as often as every 30 days, to help prevent unauthorized access to HRMS information.

A multi-pronged approach to HRMS security is something a potential investor or purchaser or cybersecurity insurance underwriter 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 software review websites list over 700 companies that provide human resources management systems. Evaluating all 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 into their other business applications, like accounting, CRM and procurement, so you get the benefits of centralization, like having to input an employee record only once. With lower integration costs, the ERP model can provide a more consistent user experience, and you get a single security model—which is why 95% of businesses report process improvements after implementing an ERP.

The downside to the ERP category is that you won’t always find the depth of features an HRMS specialist offers, so you may need to do some tasks, like running payroll, yourself. User interfaces can also be less user-friendly—more an accounting interface than a consumer-grade social media experience.

Best of breed providers specialize in one to three areas (sometimes more) of an HRMS. They offer more feature depth with less-complex user interfaces. The downside to best of breed providers is they usually can’t provide an entire end-to-end HRMS system, and there are add-on costs if you need integration with other systems, like accounting. The system may not grow with your company, so ask about scalability.

Service providers offer a fully outsourced solution, where a company pays a provider to run payroll, file taxes, administer benefits, keep the HR department compliant and 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 be employed by your company.

Such services come at a higher monthly cost, can be difficult to leave, give you less control over 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 HRMS project. 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 new accounting system or a merger or acquisition. Other drivers include new regulatory reporting requirements, 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 are narrowed down, it’s a good idea to bring in a cross-section of employees who will actually use the system to weigh in on the interface and functionality. These employees can then act as 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:

  1. If your IT ethos is forward-looking, explore systems that can use machine learning and predictive analytics now and that have a roadmap to AI. The sooner you start feeding the system data, the better it can advise on future workforce needs and match candidates to positions.
  2. Different HRMSs excel in certain areas. Do you have a lot of turnover? Then look carefully at candidate management capabilities. Got a multi-state or -national workforce? Make sure the system can handle complex payroll scenarios. Do you bring on a lot of temps but wonder if it wouldn’t be smarter to hire? A contingent workforce management function can help with analysis.
  3. You won’t sell an HRMS to budget holders by talking about cool features. What gets a project funded are insights into how the system will help retain talent, free up HR staff for value-added projects and minimize audit findings.
  4. Bring your security team or consultant into the selection process early, especially if you’re in a highly regulated industry like finance or health care.
  5. If you do decide to go the best-of-breed route, look for open APIs that make integration, if not simple, at least possible without a big, expensive development project.