What Is Human Capital Management: A Comprehensive Guide
The practice of human capital management, or “HCM” for short, has become increasingly prevalent in the last few decades. This is for a couple of reasons.
One is that leaders recognize that an organization’s workforce is its greatest asset. The second is that, for many companies, the cost of their workforce is often their greatest expense.
As a result, HCM has become the driving force behind many new business practices, a growing abundance of human capital management software solutions, and an emphasis on the concept of human capital as a competitive advantage.
The goal of this article is to educate you on the essentials of what HCM is and why it’s important, using simple terminology and straightforward business concepts.
- Definition of human capital and human capital management
- Examples of human capital activities and initiatives
- Difference between HCM and human resource management
- Elements of a human capital management system
- Importance of human capital management
What is Human Capital Management?
Human capital management, or “HCM” for short, is the collection of organizational practices related to the acquisition, management, and development of the human workforce—or human capital—within an organization.
The goal of HCM is to optimize and maximize the economic, or business, value of an organization’s human capital in order to gain a competitive advantage. Effective human capital management enables the organization to successfully pursue human capital initiatives.
The elements of human capital management
Human capital management integrates various processes and practices aimed at optimizing employee performance and contribution to the company's goals. The key elements of HCM include:
- Recruitment and Talent Acquisition
- Onboarding and Orientation
- Training and Development
- Performance Management
- Compensation and Benefits
- Succession Planning
- Workforce Planning and Analytics
- Employee Engagement and Retention
- Compliance and Risk Management
Why is Human Capital Management Important?
The effective utilization and engagement of an organization’s human capital has been proven to have a direct impact on a wide range of organizational KPIs (Key Performance Indicators), including productivity, employee turnover, product quality, work safety and customer satisfaction.
When people within the organization can see the thinking behind each element of human capital management, engagement tends to rise as they can see their path forward and feel as though the organization is invested in their success.
Engagement Driving Business Outcomes
Gallup’s 2022 State of the Global Workplace report ties employee engagement—a feeling of being highly involved and enthusiastic about their work and workplace—to a wide variety of business outcomes and the overall performance of workplace culture.
They reported that most employees are not engaged. Worldwide, the percentage of adults who work full time for an employer and are engaged at work is just 21%.
Gallup also offers a number of compelling statistics that show how business units in the top quartile of global employee engagement perform versus those in the bottom quartile.
- Higher productivity: 41% lower absenteeism and 17% higher productivity
- Lower turnover: in organizations with high employee turnover, highly engaged business units achieve 24% lower turnover
- Better product quality: highly engaged business units experience 40% fewer quality incidents (defects).
- Better customer experience: highly engaged business units achieve 10% higher customer metrics and 20% higher sales.
Effective human capital management is critical for ensuring the health and success of your business and equips you to compete for top talent.
How human capital management technology can help your company
Leveraging human capital management (HCM) technology can bring transformative benefits to your company.
Here are five examples of how HCM technology can enhance various people operations functions:
Streamlining Recruitment Processes
Human capital management (HCM) technology significantly streamlines the recruitment process by automating and optimizing tasks for the recruitment team that tie directly to the experience of both the hiring team and candidates.
Advice: Use HCM software for posting job listings across multiple platforms, tracking applicants and managing communication with candidates. AI-driven tools for resume screening allow you to quickly identify the most suitable candidates.
Enhancing Onboarding Efficiency
HCM technology facilitates a smoother and more efficient onboarding experience for new hires by automating administrative tasks and providing digital platforms for easy access to training materials and essential documents.
Advice: Leverage onboarding software to provide new employees with online forms, training materials and company information. Utilize e-signature capabilities for quick and easy document completion.
Simplifying Performance Management
With HCM technology, performance management becomes more structured and data-driven, allowing managers to track goals, facilitating regular feedback and offering insightful analytics with greater ease.
Advice: When implementing an HCM system, you'll want to define clear objectives for what you want it to do and train management and staff on how to do it before you integrate it into existing processes.
Improving Employee Training and Development
In addition to providing a centralized and accessible platform for learning, HCM technology allows for the creation, distribution, and tracking of customized training programs tailored to the specific needs of employees.
Advanced features like e-learning modules, interactive content, and progress tracking make training more engaging and effective.
Advice: Find the right learning management system (LMS) for your organization so you can offer a range of training programs and track employee progress. Incorporate gamification and interactive modules to enhance engagement.
Efficient Payroll and Benefits Administration
HCM technology can also facilitate automatic calculation of salaries, taxes and deductions, ensuring accuracy and compliance with tax laws.
It will also allow for employees to manage their benefits themselves and provide reporting tools to analyze payroll data for accuracy and to make informed financial decisions.
Advice: Adopt systems that integrate payroll processing with time tracking and benefits management. There should be reporting tools within the HCM system as well which allow you to analyze payroll data for accuracy and to make informed financial decisions.
How is HCM different from Human Resources Management?
Human capital management and human resources management, or “HRM” for short, are closely tied to each other but are not the same thing.
HCM goals
The goal of effective HCM is to optimize and maximize the value and ROI of the human capital (employees) in an organization.
HRM goals
The goal of HRM, on the other hand, is to create and manage the systems, processes, and policies required to hire, train, retain, and enable employees to do their jobs.
HCM vs HRM
The Charter Institute for Personnel and Development in London offers a distinction between the two:
“Human capital management is comprehensive because it includes not only human resource (HR) practices, but also other work practices and people management strategies that increase organizational performance. The important distinction between human resource management and human capital management is that human capital extends well beyond the HR function to encompass the total people strategy of the organization. Human capital is owned by all of the business leaders and resides with everyone in the organization.”
Effective human capital management usually requires effective human resource management practices—talent management, workforce management, proper benefits administration, succession planning, etc.
As a result, HCM systems and activities are often managed by the organization’s Human Resources (HR) department. In organizations without a professional, dedicated HR team or individual, HCM often falls to a senior leader who is responsible for HR activities.
Here's a graphic that sums up how HCM and HRM are different:
What is a human capital management system?
A human capital management system is the collective business practices, HR processes and technologies that enable an organization’s human capital to be acquired, managed and developed in an organized manner and on a large scale.
An HCM system takes a broad, organization-wide view of human capital.
Core Elements of A Human Capital Management System
These are the core elements required for a human capital management system.
Organizational vision and values
Developing an HCM system starts with defining and understanding your company’s purpose (vision) and core beliefs (values). These directly impact the workplace culture, how people behave and the overall importance of the human capital in your organization.
Strategic Goals and objectives
Whether they’re quarterly or annual goals, or more long term, your human capital initiatives will often be driven by your organization’s specific, measurable and time-bound objectives.
For example, a goal to “increase your annual employee engagement scores by X%” will drive specific HCIs that are managed within your human capital management system. This will, in turn, drive a specific set of practices to achieve those goals.
HCM leadership team
Because of the far-reaching impact of human capital initiatives, the HCM team will typically be cross-functional, with leaders from across the organization.
In organizations with a dedicated human resources function, the most senior leader in the HR department (e.g. Chief Human Resource Officer, VP of HR) will often drive HCM initiatives. In smaller organizations, this responsibility would fall to a senior executive (e.g. CEO, COO).
Data management and support
In order to manage, take action on and measure the results of human capital initiatives, you're going to need human capital data.
There are many types of employee-related data that can be captured, stored, and made available in workforce analytics. Some examples are:
- Employee demographics
- Compensation and benefits
- Payroll
- Time and attendance
- Performance management
- Skills training and development.
Any sized company, from early-stage startup businesses to large, well-established ones, can create an HCM system.
Pro Tip
Your HCM system could consist of an Excel spreadsheet for managing employee data and quarterly HCM team meetings where you review ongoing human capital initiatives. The key is to start somewhere, even if it’s small, to build the rhythms and habits necessary for long-term human capital management success.
Benefits and Challenges of an HCM
Human Capital Management (HCM) technology offers significant advantages for managing workforce processes, but it also presents certain challenges.
The following table provides a side-by-side comparison of these benefits and challenges.
| Benefits of HCM | Challenges of HCM |
|---|---|
| Streamlined Processes: Automates various HR tasks, leading to improved efficiency and accuracy. | Implementation Costs: Initial setup and maintenance of HCM systems can be costly. |
| Data-Driven Decisions: Provides valuable insights through analytics, aiding in strategic decision-making. | Complexity in Integration: Integrating HCM with existing systems can be complex and time-consuming. |
| Enhanced Employee Experience: Improves processes like onboarding and training, boosting employee satisfaction. | Adoption and Training: Requires training for staff and may face resistance to change from employees. |
| Regulatory Compliance: Helps ensure adherence to labor laws and regulations, reducing legal risks. | Data Privacy and Security: Managing and protecting sensitive employee data poses a significant challenge. |
| Improved Talent Management: Aids in effective recruitment, performance management, and employee retention. | Dependence on Technology: Reliance on technology can be problematic in case of system failures or outages. |
How to Choose a Human Capital Management System
The selection process you go through in choosing an HCM system is an important time for your organization, as the tool will heavily influence your direction and capabilities in the future.
Here are some key tips to help guide your decision-making process in choosing an HCM system that best fits your organization's needs.
Define Business Requirements
Assess your organization's specific needs with an eye toward operational efficiency and budget targets, you'll want to consider a variety of factors when thinking about what your business will need in the long term.
Identify key HR functions that require support, be it recruitment, performance management or payroll, start to consider how these systems could influence and streamline your operations.
Finally, determine scalability needs for future growth. Consider how the technology can support your organization as it attempts to scale its operations.
Evaluate Integration Capabilities
Ensure the HCM system can integrate seamlessly with existing systems such as your enterprise resource planning and finance software.
Check for compatibility with commonly used platforms and data exchange formats.
Consider User Experience
Look for an intuitive, user-friendly interface. Your employees are no different from any other consumer, meaning they have high expectations for what technology should look and feel like as they apply it.
Prioritize ease of use to facilitate quick adoption among staff. To make it even easier for employees to adopt it, assess mobile access and remote usability features.
Analyze Data Management and Reporting
Evaluate the system's data analytics and reporting capabilities. Does it answer the questions you're looking for answers to now and consider what sort of questions you'll be asking as you grow.
Ensure compliance with data protection regulations like GDPR and keep an eye on regulations related to AI's use of data as you incorporate the technology into your workflows.
Look for customizable reporting tools to meet diverse internal needs. The more you can personalize the use of whatever solution you find, the more likely people are to buy in.
Review Vendor Reputation and Support
Research vendor reliability, customer support and service quality. Read customer reviews and case studies to get more insight from other organizations who have adopted the technology
Consider long-term vendor stability and industry presence. Lesser known vendors can offer a lot of enthusiasm and flexibility around the relationship, but are also a riskier proposition due to the fragility of their own business.
Assess Total Cost of Ownership
Calculate direct costs related to the purchase and any subscription fees as well as indirect costs such as those related to training and implementation.
Compare cost against budget constraints and ROI expectations. If you can't reconcile these two areas, it's going to be a tough sell with executive teams and boards.
Finally, consider how future scalability might affect costs.
Conduct a Pilot Test
If possible, conduct a trial run with the shortlisted HCM systems. This will give you an opportunity to spot some red flags and find out how helpful the vendor's customer service team is.
Gather feedback from end-users for practical insights. Your people know better than anyone the challenges adopting this new tech could create. Getting their insight will help you smooth out potential bumps in the road before you officially move forward.
Evaluate system performance in real-world scenarios so that you see how it responds and what type of value you'll be able to glean from it.
Actionable Advice
When choosing an HCM system, prioritize one that aligns with your specific HR goals and integrates seamlessly with your existing infrastructure. Also, consider a system with a user-friendly interface and robust support and training resources to ensure smooth adoption and long-term usability.
Foward Thinking with Smarter human capital management
As we've seen from the examples above, organizations that prioritize human capital management perform better over time.
Looking forward, several trends are shaping the future of HCM. The adoption of AI and automation, the quality of the employee experience, data and privacy security and integrating technology that allows people to work on whatever device they want, where they want, is all going to continue to present challenges.
With the right systems and processes in place, employers who keep their people central to their HCM efforts will find the most success.
Key Takeaway
Embracing an HCM system is not just about adopting new technology. It's about investing in a tool that evolves with your organization, enhances your workforce management, and addresses contemporary challenges.
The right HCM system can be a game-changer, providing a streamlined, data-driven approach to managing your most valuable asset—your people.
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