Hierarchical Select setup

1. Install the Hierarchical Select module in sites/all/modules
2. Navigate to /admin/build/modules and enable the module and appropriate helper modules.
3. Navigate to /admin/admin/config/content/hierarchical_select and setup your global settings
4. Create a term reference field and select the "Hierarchical Select" widget type.
5. Set the relevant settings for that field.

To consider:
If your vocabulary was set to "tags" under the "Settings" section you will not get any options to configure Hierarchical Select on that vocabulary.
If you still want a "tagging" system you can still select "Allow creation of new terms" and Hierarchical Select will add a "create new item" to the drop down selection.

If you are having issues with your javascript not working see http://drupal.org/node/734178