Understanding Human Capital Management (HCM)

October 06, 2023

Discover the benefits of a human capital management approach to business — and how HCM technology can elevate your talent management strategy.
Blog Post

People are the lifeblood of any organization — without them, it cannot succeed.

That’s why many modern organizations have adopted a human capital management (HCM) philosophy as a part of their people strategy. HCM prioritizes employee experience and professional development (often alongside HCM technology) to drive business outcomes.

While HCM refers to this overall approach, the term is also used to describe an all-in-one HR and payroll software solution.

An HCM solution goes a step further than traditional payroll software. It integrates strategic processes and tasks that help an organization function and evolve as its employees grow. This comes from HCM’s fundamental shift regarding how employees should be viewed and managed by the organizations that hire them.

So, how can your organization place people at the center of your business strategy? Let’s break down the building blocks of HCM and the role technology plays.

Key Takeaways

  • Human capital management (HCM) strives to foster a productive work environment by encouraging employees to advance and grow with the business.
  • HCM allows companies to demonstrate their investment in their employees' futures by promoting career growth.
  • HCM technology helps organizations deliver strategic talent development initiatives by enabling work-life balance, sharing knowledge, and providing training programs.

What Is Human Capital Management?

The purpose of human capital management is to help employees grow along with your company to facilitate a productive workplace. Ideally, employees become experts in their roles, learn new skill sets, and contribute to the organization’s culture of career development.

Similarly, supervisors and managers can learn how to support these opportunities and encourage employees to pursue them.

Human capital truly is a business investment — in people. Human capital management ensures that investment is well-spent by providing the tools to help all employees, and your organization thrive.

Human Capital Management vs. Human Resource Management

HCM and human resource management (HRM) overlap, but aren't quite the same. HCM is focused on developing human capital and outlines the strategies your organization will use to sustain and grow the business. HRM is more tactical and typically addresses HR functions such as recruiting, onboarding, compensation, and benefits.

HCM tends to be more comprehensive and covers the entire employee lifecycle at an organization, while HRM focuses on executing the core functions of HR activities.

For example, HCM would define the core competencies that an organization’s employees will need to make the business successful, and HRM would identify how to recruit and retain those employees. 

Why Is Human Capital Management Important?

HCM is important because employees want to feel connected as an integral part of the organization, so keeping them engaged and involved is crucial to retaining talent. If the “Great Resignation” has taught us anything, it’s that employees are willing to leave if they don’t feel valued.

One of HCM’s greatest benefits is helping organizations demonstrate their commitment to their employees’ futures by fostering career development. As role specialization increases, it becomes even more imperative for companies to find employees who not only have the right skill sets for the job today but can learn the skills needed for tomorrow.

HCM excels at helping HR effectively recruit top talent and keeping that talent focused on the future. If employees see a path forward in your organization, you can bet on improved job satisfaction and reduced turnover costs.

Challenges Involved in Human Capital Management

Human capital management is never simple. After all, beyond business terminology, we’re talking about real people here. Motivating human beings and helping them achieve their full potential can be a rewarding process for them and for you. But you'll have to negotiate many challenges along the way.

Getting and Keeping Talented Employees

Among the many reasons to use HR software, attracting and retaining top talent is high on the list. As a key tool within your recruitment strategy, an HCM solution will help you:

  • Filter applications based on skills and experience.
  • Establish which recruitment channels are the most effective.
  • Measure candidate and ongoing employee engagement.

HCM technology can enhance your retention efforts in many ways: from offering skill and leadership training, improving company-wide communication, and ingraining peer recognition in your culture.

Developing Training Programs

Many of today’s workers are looking past the paycheck for career opportunities that'll help them improve not just job skills but also leadership skills as well. Offering training programs is a great retention strategy that also benefits your organization.

Taking a strategic approach to learning and development will help ensure your workforce is prepared for the future. Using an HCM solution can help you assign training and track progress, while also providing a wealth of data to help you identify and address skills gaps.

Creating a High-Performance Workplace Culture

Fostering a high-performance work culture has a positive impact on the bottom line in many ways — innovation, productivity, and long-term talent retention to name a few.

But it’s important to remember that high performance is a lot more than hiring over-achievers. Designing an employee experience that engages workers not only in their job but also in the success of your organization creates a culture of continuous improvement as well as loyalty.

A comprehensive HCM system helps organizations deliver strategic talent development by enabling collaboration, career growth, and work-life balance.

Anticipating Management Changes

Sometimes, managing change in the workplace can be one of the trickiest challenges of all. That’s because, by its very nature, change is unpredictable.

One thing you can do is to keep everyone informed about new projects and upcoming organizational reshuffles. The impact of such events can be difficult to know in advance, but giving a heads-up can help everyone adapt.

What Is Human Capital Management Software?

HCM software is a comprehensive digital toolset designed to help develop and execute HCM strategy throughout the employee lifecycle.

HCM technology provides administrative functionality for executing core HR functions. It also has strategic capabilities like data analysis tools that help HR professionals monitor employee trends and make more informed business decisions.

The Key Functions of HCM Software

An HCM solution includes traditional HR technology, such as payroll processing or benefits administration. It adds to those practices and integrates them with larger, strategic processes, such as succession planning, performance management, and employee sentiment analysis.

Again, the goal of HCM strategy is to ensure the organization can both function efficiently and nurture employee growth. To do this, an HCM technology platform addresses:

  • Administrative tasks: to keep your organization and its workers operating smoothly
  • Workforce management: to plan and manage labor costs and minimize compliance risks
  • Talent management: to recruit, train, and retain high-performing employees

A modern, integrated HCM solution typically includes these HR functions:

Payroll Software

Workforce Management

Talent Management

Employee Experience

  • Expense Management
  • Tax Services
  • Wage Garnishment
  • Benefits Administration
  • Time and Attendance
  • Scheduling
  • Recruiting
  • Onboarding
  • Performance Management
  • Compensation
  • Learning and Development
  • Communication
  • Employee Surveys
  • Peer Recognition

Features of HCM Systems and Software

Modern HCM solutions are generally customizable and as varied as the organizations they serve, but there are a few common denominators among them:

  • Cloud-based. Although not all HCM software is cloud-based, most modern systems are. Using HCM technology through the cloud is usually more secure and scalable than an on-premises solution, which is especially important when you are planning for your future talent needs.
  • All-in-one suite. In contrast to legacy Human Resource Management (HRM) or Human Resources Information System (HRIS) technology, an HCM solution integrates payroll and HR functionality with a single employee record. This creates one true source of employee data, which allows for more streamlined and accurate processes.
  • Reporting and analytics. A complete HCM system provides meaningful insights into the health of your workforce, such as turnover rates and employee diversity, to help you and your executive team get to know your people better.

Other features of today’s HCM technology often include employee self-service portals where workers can manage benefits, scheduling, on demand pay, and other services offered by your organization.

How to Choose HCM Solutions

Choosing the right HCM system or software is probably the most important technology-buying decision for an HR team, says the Society for Human Resource Management (SHRM). Here are a few factors to consider when evaluating if an HCM platform is right for you:

  • Alignment with organizational needs. By far the most important factor is how well the software suits your needs and goals. When evaluating systems, emphasize your needs to potential providers so they can address specifically how their product will help you achieve your goals.
  • Real-life case studies. While you are researching possible solutions, be sure to look at case studies from organizations in your industry or that have similar workforce pain points — you may discover other uses for HCM technology you hadn’t considered!
  • User-friendliness. Make sure the software is intuitive and easy to use for all your business users. A solution that no one knows how to use won't get you very far!
  • Custom capabilities. How agile and customizable is the platform? Keep in mind that technology evolves quickly. You want to find a solution that will keep you ahead of the curve and meet your future needs as well.

Getting Started with Human Capital Management Solutions

When you’re first contemplating where to start with HCM solutions, the range of options available can seem intimidating. You need a system that aligns with your current business needs, but which will also continue to be fit for purpose as your organization develops and grows.

The system you use must work for your specific business, augmenting and enhancing your current processes and culture — not disrupting them. One other key factor is making sure that your service provider offers the ongoing support you need to get the most out of your investment over time.

There are hundreds — if not thousands — of HCM solutions on the market. You can cut through much of the clutter by checking out Paylocity HCM solutions recognized by G2, the peer-to-peer business software review site.


FAQs About Human Capital Management

How will HCM Technology Continue to Evolve?

We've seen HCM technology come a long way — from simple record-keeping systems, to client-server software, and now cloud-based all-in-one platforms. So, where's it headed next?

On the frontier of HCM technology is artificial intelligence (AI), or machine learning. The latest HCM solutions are already embracing AI with features like procedurally generated announcements, intuitive employee scheduling, and advanced sentiment analysis. Machine learning unlocks a new level of strategy for HR professionals.

But don't worry. Machines won't be replacing HR. There's still value to keeping people at the center of your people strategy. AI just provides new avenues for HR pros to streamline their day-to-day and advance analytics for more strategic and impactful initiatives.

What Are Examples of Human Capital Management?

HCM covers all kinds of operational and strategic applications that are relevant to how your teams work — everything from day-to-day HR management processes to more high-level analytics. Examples include:

  • Payroll processing
  • Recruitment and onboarding management
  • Employee benefit management
  • Staff training and development
  • Real-time reporting and analytics
  • Regulatory and legal compliance
  • Employee time and attendance monitoring

What Must an HCM Strategy Include?

The main purpose of any HCM strategy is to enable the management of employees in a way that helps the organization meet its strategic objectives. To meet that goal, it must take a broad-based overview of current performance and drill down into operational details at a granular level.

A comprehensive HCM strategy considers several metrics such as productivity, efficiency, and business impact to identify current needs, gaps, and directions for the future. From there, you can begin determining the technology you’ll need to make that strategy viable.

What Are the Components of Human Capital?

Human capital is generally defined as the economic value that each human being brings to an organization. It’s a wide-ranging definition that covers the total of all the relevant skills and experience each individual adds.

While human capital may consider employee attributes such as education or other qualifications, it is a much deeper approach to helping workers forge a future with your company. Instead of a restrictive term, human capital opens a world of possibilities for both companies and their employees.

HCM strategies are most effective when they work with our humanity rather than seeking to contain it.


HR Tools Built With Employees in Mind

Recruit and retain talent by shaping an environment that makes employees feel valued and engaged. With HR tools built with employees in mind, you can equip your employees to be more self-sufficient and gain valuable insights into what you can automate and where you can strategically focus your resources. You can deliver the experience your employees need to find meaning in their work, and you'll continue improving efficiency.

Human Resources Software