Mario Ellis is ready for a change. As director of compensation and HR systems for the University of Chicago Medical Center, which employs 6,300 people, Ellis wants more flexibility than his ERP-based goal-setting and performance-evaluation system currently provides. He envisions replacing it with a system that uses a dashboard interface to inform him at a glance about important human-resources concerns, such as succession planning, employee performance, and compensation.

“I want something that’s more intuitive,” says Ellis, who still relies on paper for some tasks. He also wants a system that can better align the medical center’s workforce with overall strategy.

There certainly is no shortage of such systems to choose from. The “talent management” software market is booming, and the products — often sold via a cloud-based, “software as a service” (SaaS) subscription model — offer plenty of bells and whistles, everything from core capabilities such as tracking a worker’s tenure and career goals to the ability to create employee profiles that mimic those found on popular social-networking sites such as LinkedIn and Facebook.

According to Forrester Research, such SaaS-based systems, offered by companies like SuccessFactors, WorkDay, Taleo, Lawson, and many others (not to mention the major ERP vendors), attracted strong interest in 2010 and are fast becoming mainstream for recruitment, performance management, and many other HR functions. Current costs run between $350,000 and $400,000 annually for the primary components in a performance-management suite that serves about 10,000 employees, says Lisa Rowan, program director for HR and talent-management research at market researcher International Data Corp. (IDC). Smaller companies can get started for as little as $25,000 a year (in a SaaS model).

Assessing the ROI

While the software may have come a long way, it can’t solve all the thorny HR problems that plague companies. But the benefits of a well-implemented talent-management system could be huge, analysts say. Superior talent management is strongly connected to enhanced business performance, according to Ernst & Young’s 2010 report “Managing Today’s Global Workforce.” The survey found that companies that aligned talent-management programs with their business strategy delivered a return on investment (as measured by return on common equity, or ROE) that was, on average, 20% higher over a five-year period than companies lacking such alignment. Among companies that integrated certain key elements of talent management (such as succession planning and recruiting), the results were even more dramatic: ROE over a five-year period was, on average, 38% higher than those that failed to integrate those capabilities.

One activity that the new systems aim to improve is the employee performance review. Historically, such reviews have been conducted mostly for legal reasons — to justify salary decisions or create a paper trail for a bulletproof termination. Usually the process is loathed by managers and employees alike, and the resulting forms are typically stashed away in file cabinets.

“People aren’t good at it and they know they aren’t good at it,” says Steve Hunt, an industrial organizational psychologist and a director of business transformation services at SuccessFactors. “People really struggle to give feedback.” They also struggle with the unpleasant and difficult conversations that can follow reviews.

If they do them at all. Prior to installing a talent-management system in 2007, only 30% of Comcast employees surveyed reported receiving a performance review within the previous 12 months. After the company implemented a system from German software giant SAP, that figure jumped to 98%. Those results enabled Comcast to identify its best employees and better fill its 25,000 annual job openings, according to a study by IDC.

The systems still require the inputting of data (such as ratings for teamwork, behavior, job competency, and so on), but those scores are then integrated with the goals of both the employee and the company, allowing managers to measure employee development against their individual plan and the overall strategy and direction of the company. They can be particularly useful in refining pay-for-performance systems.

Putting Data to Work

While the surfeit of products in this space creates a daunting shopping challenge, the key to success is to focus less on which one you use and more on how you use it, says Richard Beatty, a professor of human-resource management at Rutgers University. Beatty, who counts General Electric and Cypress Semiconductor as consulting clients, warns that HR may impede the maximum ROI that such systems can yield because it often emphasizes making the company a great place to work, while finance wants to identify top talent, reward it, and cut where necessary.

“The real work is identifying what should be tracked and what decisions should be made to get a good outcome,” he says. “If you can’t use information to make decisions that will leverage the strategic success of the enterprise, then why collect the data? These systems can give you more data, but you still have to address the decision-making.”

Others say the issue is more complicated. David Lipscomb, a former vice president of diversity at Sovereign Bank and now an HR consultant, says too many companies (including his former employer) use performance reviews to focus on the top 10% of performers, and to facilitate short-term cost-cutting, while doing little that is relevant to the rest of the company’s workers. Lipscomb, who has also worked in finance, believes that performance-management systems should be used more often to identify an employee’s particular skills and how best to tap them, as opposed to merely facilitating “rank-and-yank” systems.

If the newest talent-management systems have yet to solve complex managerial issues, it isn’t for lack of trying. Vendors are exploring many new approaches, often driven by a marked dissatisfaction with current HR practices.

Canadian start-up Rypple, for example, has developed a simple, Web-based application that managers and peers can use to provide constant feedback. “It’s just ridiculous that once a year you stop your business for a week or two in order to fill out evaluation forms,” says George Babu, a Rypple co-founder and former Research in Motion executive. “You might spend $100 million a year on payroll yet lose millions of dollars in productivity” that way.

Rypple isn’t a full-on replacement for employee reviews. But the system makes it easier to capture who performed how well on what kind of project, which should make reviews easier and more relevant.

The systems themselves are becoming easier to use, and that counts for a lot, according to Libby Sartain, former chief HR officer at Yahoo and Southwest Airlines. She says that in the past five years the Web-based systems have become both simpler and more reliable. But, she adds, none provides the Holy Grail that is really needed: an assessment of the specific skills a company will require three or four years from today.

“Companies need to think ahead about the workforces they’ll need in several years, and that’s really hard,” she says. “No system does that.”

Not yet, anyway.

Kim Girard is a freelance writer based in Boston.