What is Human Capital Management (HCM)?

Explore what Human Capital Management (HCM) is, how to maximize its potential, and the advantages it can offer your company.

Definition of Human Capital Management (HCM)

Let’s start with a reference to Gary Becker’s* definition of human capital:

“Human capital is the compilation of productive skills inherent in an individual that can be employed to generate income in the job market and enhance a household’s consumption choices. (…) individuals can apply their human capital at work or in the household, but they cannot trade or purchase it in the marketplace.”

If we consider human capital as a collection of skills defining an employee, then Human Capital Management (HCM) is a method of optimizing these skills for the company’s growth. Human Capital Management includes traditional HR functions (core HR functions) like absence management, benefits administration, payroll data, and workforce planning. Additionally, it emphasizes skill development, employee engagement, talent retention, and other factors contributing to the company’s effectiveness. The primary goal of Human Capital Management is to leverage people’s potential effectively to achieve the company’s business strategy and goals.

* // Weiss, Y. (2015). “Gary Becker on Human Capital.” Journal of Demographic Economics, 81(1), 27-31. Retrieved from Department of Economics, Universite Catholique de Louvain

Why is Human Capital Management Important?

Human Capital Management is important because it streamlines HR processes, aligns strategy, fosters talent development, saves costs, and enables data-driven decision-making. As a result, companies gain a skilled, engaged, and adaptable workforce.

Benefits of Human Capital Management for Businesses

Human Capital Management provides businesses with a range of advantages:

Simplifying Organization’s Workforce Management

The HCM strategy optimizes operational flexibility and streamlines the workload for administrative staff. This is achieved through various measures, including the automation of HR tasks and the implementation of employee self-service delivery, ultimately reducing the overall number of manual tasks.

Effective Performance Management

Implementing a comprehensive HCM strategy, combined with the use of the cutting-edge HR software, contributes to building a high-performance company culture.

More Intelligent Workforce Decisions

Human Capital Management offers insights into workforce trends and performance metrics, providing valuable real-time data and analysis to support data-driven decisions.

Improvement of the Recruitment Process

With Human Capital Management, companies can streamline their hiring process to attract and onboard the right talent. This helps in building a skilled and diverse team.

Identification of Talent Gaps

Human Capital Management is committed to providing continuous learning, assisting employees in acquiring new skills to address talent gaps. Employee training boosts individual performance, contributing to the overall productivity of the organization.

Increased Employee Retention

By using recognition programs, performance reviews, professional development, and competitive pay, Human Capital Management effectively meets team needs. It helps retain employees while also improving talent acquisition efforts.

Increased of Workforce Productivity

HCM strategy helps to increase workforce productivity by providing greater agility and quicker responses to changes in the business environment.

Human Capital Management Challenges

Here are some key challenges associated with Human Capital Management:

• Benefits Management: Effectively managing benefits is a crucial aspect of an HCM strategy. However, many companies find it challenging to design and implement benefit packages that meet diverse workforce needs without overstraining the budget.
• Employee Records: Efficient administrative management is also crucial for HCM strategy. Meticulously maintaining employee records can be challenging, especially when managing a large volume of employee data without the use of a digital system. Organizations must also comply with legal regulations regarding the collection, storage, and use of employee data (such as GDPR or HIPAA). Any legal violations erode employee trust, and without a foundation of trust, a company will struggle to thrive.
• Employee Lifecycle: Managing the entire employee lifecycle, from recruitment to retirement, is a complex task. Organizations face difficulties in efficiently onboarding new employees, retaining top talent, and handling transitions like promotions or terminations. Failure to ensure a smooth employee experience makes it challenging to execute HCM strategy effectively.
• Employee Experience: Creating a positive and engaging employee experience and supporting a culture that values employee well-being, professional development, and work-life balance are essential elements of Human Capital Management. Neglecting these aspects can hinder the success of the HCM strategy.
• Employee Development: Investing in employee development is key to having a skilled and motivated workforce. Organizations often struggle to identify suitable training programs, aligning development opportunities with organizational goals, and measuring the impact of these initiatives on employee performance.

Human Capital Management Software and Tools

Today’s HR software combines the strengths of cloud computing with advanced technologies like Artificial Intelligence, Machine Learning, and big data analytics. It offers organizations an easy initial setup, keeps evolving, and prioritizes flexibility and mobile use. This combination of features makes it an excellent solution for effectively managing the entire workforce in a company.

Now, let’s take a look at HCM solutions and similar tools.

Core Elements of A Human Capital Management System

There are various HCM systems available, each distinguished not only by its visual interface but also by diverse functionalities. Effective human capital management systems should encompass modules for:

• Core Administrative Support: This includes personnel administration, benefits administration, payroll, and service center functionalities. An ideal system should also provide an employee portal for tasks such as submitting vacation requests and checking leave balances.
• Talent Management: Covering recruiting, hiring, onboarding, and retaining professionals, this module includes features like competency management, performance management, and learning or training.
• Workforce Management: Covering compensation planning and strategy, time and expense management, contingent workforce management, organization visualization, and succession planning.
• Reporting and Analytics: This involves comprehensive workforce analytics to provide valuable insights into human capital trends and performance.
• Workflows: The system should incorporate well-organized workflows to streamline the tasks of specialists involved in human capital management.

The HCM system should cater to your specific needs. In addition to the previously mentioned modules, it’s beneficial if the system:

• Has a central employee database for easy access to information such as employment details, history, qualifications, and salaries etc.
• Can integrate with other systems and tools to ensure smooth information flow across different areas of the organization.
• Features a user-friendly interface to ease implementation and operation.
• It is flexible to adapt to changing organizational needs.
• It undergoes continuous development by the vendor, who also offers after-sales care and technical support.

Innovative technologies are increasingly leveraging cloud computing. Cloud-based HCM software is a solution that offers mobile accessibility and streamlines management in distributed organizations, allowing employees to work remotely from anywhere in the world.

Human Capital Management System vs. HRMS

HRMS* primarily concentrates on operational tasks like payroll and benefits administration, emphasizing efficiency in day-to-day HR processes without the broader strategic alignment that an HCM system offers. HCM often integrates advanced technology, analytics, and strategic planning tools, while HRMS is more focused on administrative functions.

* / It is Human Resource Management System, not Human Resources Management System.

Human Capital Management System vs. HRIS

HRIS is designed to automate HR processes, including employee data management, payroll, benefits, and basic reporting. Its primary goal is to enhance operational efficiency, lacking the strategic orientation found in Human Capital Management (HCM).

* / It is Human Resource Information System, not Human Resources Information System.

Human Capital Management System vs. ERP

Enterprise Resource Planning (ERP) systems provide a broader organizational framework that includes human resources along with other business functions, such as finance, inventory management, and customer relationship management. While HCM systems are mainly utilized by HR professionals and managers responsible for human resource functions, ERP systems are used by various departments and employees across the organization to streamline and coordinate different business processes.

Human Capital Management System vs. WMS

A Human Capital Management (HCM) System and a Workforce Management System (WMS) are integral tools for optimizing organizational efficiency, but they serve distinct purposes. While an HCM system focuses on broader aspects such as talent acquisition, employee development, and strategic workforce planning, a WMS is geared towards operational functions like time and attendance tracking, scheduling, and labor forecasting. Together, these systems form a comprehensive suite, ensuring seamless integration between strategic human resource initiatives and day-to-day workforce operations for holistic organizational success.

How Human Capital Management Technology Can Help Your Organization

The HR function is to integrate the work of various departments, ensuring they collaborate on an equal basis in the area of employee management. Implementing Human Capital Management practices and adopting them as a strategic approach improves overall employee management and facilitates the achievement of business goals. It brings numerous benefits to the company, such as optimizing manual processes, expediting the hiring of new talent, facilitating the onboarding of new employees, aiding in making better talent decisions, and enhancing communication within the team.

HCM doesn’t just handle administrative tasks; it actively contributes to creating business value.

Finding an HCM Solution That’s Right for Your Business

Planning your business growth involves first identifying your company’s needs and establishing a budget for your software investment. Following this, assess whether the chosen HCM solution aligns with and improves your core HR and business processes. Look for user-friendly time tracking features, ensuring compliance regulations are met, and maintaining strong data security.

Human Capital Management FAQs

How Do You Build Human Capital?

Building a company’s human capital is an ongoing process from its inception. This involves investing in employees’ knowledge, skills, and abilities to boost productivity, leading to overall company growth. Factors influencing human capital quality include effective recruitment, training, performance management, and employee engagement.

Does the HCM System Include Payroll?

HCM capabilities encompass payroll functionalities as a core component in most available systems.

Human Capital Management vs. Talent Management

Talent management strictly focuses on identifying and developing high-potential individuals, with an emphasis on leadership and strategic initiatives for the long-term success of the organization. It is also pivotal in managing employees and fostering their career development. Implementation can be achieved using independent tools or, specifically, HCM systems.