It’s a business cliché that your most valuable asset is your people, but one that is true for most organisations. So it’s not surprising that companies spent more than $3 billion in 2005 on software designed to monitor, manage, evaluate and motivate their employees.

Talent management software can potentially reduce costs such as recruitment, training and administration. If you can identify good candidates and hire them faster, then the company is more productive and spends less on advertising and interviewing unsuitable candidates. Similarly, if you can automate training needs analysis, then staff turnover will generally reduce, and employee motivation will increase.

“Essentially, the software lets you know who is doing a good job against business or learning objectives, and who isn’t,” says Keith Smith, VP of sales with HR software supplier SumTotal. “It also provides you with a consistent way of measuring performance regardless of who is being monitored or where.”

A typical company will spend between 5% and 10% on recruiting and retaining employees – although in sectors such as retail with higher staff turnover, this figure may be closer to 50%. Using talent management software can often reduce costs by 10%, which represents a big saving for many businesses, says Smith.

US video chain Blockbuster has been using talent management software company from Taleo for several years, and has reduced annual staffing costs by $5.3 million. Using the same software, Dow Chemicals reduced its recruitment costs by more than 30%.

However, such benefits can only be achieved if you get the right software, at the right price. So it’s important for HR executives to have a clear idea of what they expect from the HR function before speaking to any suppliers. Although most talent management applications cover broadly the same features, each product has its own unique focus and strengths, says Jim Savege, head of strategic services with Staffordshire County Council.

For senior executives, one of the most important features in a talent management solution will be its reporting capabilities. Most packages have embedded reporting tools that allow managers to gain a detailed, real-time view of each employee’s job function, abilities and contribution towards wider business goals.

When Staffordshire purchased a talent management system in 2004, it undertook a 12-month project to define its requirements, explains Savege: “We spoke to end users, managers, HR professionals and people within other departments who would be affected by the changes, asking what they needed,” he says. “We translated that into a series of practical outcomes, which gave us something to take to the market. We could basically say to them, can you do that?”

It’s also useful at this stage to work with the HR department in creating a business case for the proposed software, adds Lesley Garside, operations manager with Northgate Information Systems. “A business plan doesn’t have to be a real drama, it’s just a case of saying what the software will do, what it will cost, and how you will measure the benefits it delivers,” says Garside.

In some cases, suppliers can help finance and HR departments create the business case. Bob Ferneyhough, HR director at Henkel, the consumer goods giant responsible for brands such as Sellotape and Schwarzkopf, took this approach. “We needed to convince our internal board that the new software was a good investment,” says Ferneyhough. “We wanted to put together cost/benefit figures and return on investment data and the suppliers were able to help us with that.”

When dealing with software suppliers, there are ways to ensure you get the best possible deal. For example, when Staffordshire County Council was looking for a software provider, Jim Savege insisted on details of their previous customers – and then visited those sites to see the software in action. “We asked them to prove they could do what they promised and basically, it was zero points to anyone who said they thought it could be done,” he says.

When purchasing talent management software, finance directors have two options: integrated suite or best-of-breed. Large enterprise software vendors such as SAP and Oracle specialise in providing software to manage every kind of business process, from logistics to finance and HR. If you’re already using SAP to manage your company’s finances, then using SAP in the HR department will probably reduce integration costs and make it easier for staff to share information across multiple departments.

Best-of-breed suppliers are independent software companies that specialise in just one area of the business. Leading talent management software vendors include SumTotal and Taleo. These packages may be tougher to integrate than enterprise software products, but they can often provide more sophisticated features and can be easily tailored to your company’s individual needs.

But it’s easy to blow the budget on something that your business doesn’t really need, says Forrester analyst Paul Hamerman. “We find that many midsize companies are swayed by slick sales presentations from top vendors but actually only use a fraction of these capabilities,” he says. “It’s important not to bite off more than you can chew.”

In many cases, it may be a better use of your budget to use a hosted or outsourced software solution – particularly if you aren’t sure that your company really needs all the bells and whistles. A hosted application doesn’t sit on your own computers, but is hosted and managed by a third party. As a customer, you simply pay a monthly fee per person to access that software over the internet.

The advantage of hosting is that it’s generally cheaper than buying the software yourself, and there are no expensive maintenance headaches. “It’s certainly worth considering outsourcing if you need something quite standard,” says Hamerman. This is particularly true for companies where headcount is relatively low (under 1,000 employees) and where you are likely to want to upgrade or expand the system within five years. Taleo’s customers, for example, access its software as a hosted service, which can be used within a standard web browser from £60 per user, per month.

Once you have selected a software product, make sure you know exactly what you will be spending. On average, the upfront cost of a software license only accounts for 30% of total spending. In addition to licenses, your budget will also need to cover the cost of implementation, support, training and integration. In some cases, it may be worth compromising on functionality to buy a product that will be cheaper to implement and support.

For example, when Henkel needed to replace an outdated Peterborough HR application, the company short-listed two potential suppliers: SAP and Northgate. Although the SAP product offered more functionality and was used elsewhere in the organisation, the HR team were more familiar with Northgate because it was the new owner of Rebus HR, which had previously owned Peterborough Software. “We were comfortable with them because we knew already they understood our business and could work with us,” says Ferneyhough.

When meeting with software providers, always ask about their support and account management services – is there a 24-hour helpdesk or will you be forced to pay for a third-party engineer to fix your system so that employees can be paid on time? It’s also worth looking at a supplier’s financial status. The HR software market is consolidating rapidly, and if your provider goes out of business you could end up with a product that is no longer supported or can’t be upgraded in the future.

Finally, be aware that many software vendors will try to sell customers comprehensive HR software ‘suites’ with various modules that can take several years to implement. In some cases, customers end up paying thousands of pounds licensing software that won’t be used for several years – a phenomenon known as ‘shelfware’. A quick way to cut the cost of HR software is to limit license agreements to core applications that will be implemented within one or two years, with options to add modules later.

“Ultimately, the best way to make the most of your HR budget is to ignore the glitz,” advises Northgate’s Garside. “Know what you want and use your money to buy that.”

Once you have fixed the cost of talent management software, consider what benefits you expect from the system – and how those will be measured. Improving the quality of your talent management can avoid the cost of recruiting and retraining workers. A recent article in Harvard Business Review found that companies without a clear talent management strategy were more likely to lose people with the talent they needed, and waste money retaining employees with outdated skills.

There are three other major benefits you should expect from this kind of project, explains Chris Phillips, European marketing director of Taleo. First, there should be a rapid reduction in the cost of recruitment – talent management allows you to manage the entire recruitment cost online, thereby speeding up the process and reducing advertising and agency fees. “You should expect to reduce ad spend by at least 30% or 40% in year one,” comments Phillips.

Second, the time taken to identify a personnel need (whether it’s a new job vacancy or a skills gap) should be shorter, thereby improving productivity. Finally, you should expect to improve the quality of hiring.

“This can be difficult to measure, but you should start to see a reduction in turnover because you’re not hiring the wrong people, and you’re putting people into roles they are skilled to perform,” says Phillips.