Understanding Human Capital Management (HCM)February 20, 2023
Learn about human capital management and how to choose the right HCM software for your organization.
Table of Contents
- What Is Human Capital Management?
- Why Is Human Capital Management Important?
- Challenges Involved in Human Capital Management
- What Is Human Capital Management Software?
- The Key Functions of HCM Software
- Features of HCM Systems and Software
- How to Choose HCM Solutions
- Getting Started with Human Capital Management Solutions
- FAQs About Human Capital Management
Businesses today are taking a more holistic view of human resources to support workers across the entire employee lifecycle.
Many have adopted a human capital management (HCM) philosophy that encompasses both practice and technology to connect talent strategy with business outcomes. While HCM refers to this overall approach, the term is also used specifically to describe an all-in-one HR and payroll software solution.
An HCM solution goes a step further than traditional payroll software to integrate 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.
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. Organizations accomplish this by providing opportunities for employees to become experts in their roles, learn new skill sets to expand those roles, 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 thrive and, subsequently, your organization as well.
Human Capital Management vs. Human Resource Management
HCM and human resource management (HRM) are similar and overlap, but are not 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. For more details, check out our resource article on the differences between HCM and HRM systems.
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” 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. Moreover, 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.
This is another area where HCM excels by helping HR recruit top talent more effectively and keeping them focused on the future to improve job satisfaction and reduce 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 along the way, there will be many challenges to negotiate.
Getting and Keeping Talented Employees
There are many reasons to use HR software, and 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
There are many ways HCM technology can enhance your retention efforts, from offering skill and leadership training to improving company-wide communication to ingraining peer recognition in your culture.
Developing Training Programs
Many of today’s workers are looking past the paycheck for career opportunities that will 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 will have 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.
Here again, a comprehensive HCM system helps organizations deliver strategic talent development initiatives by enabling knowledge sharing and collaboration, providing training programs linked to career paths, and giving all employees access to tools that help them manage their own 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.
Although you can’t always predict how things will change, you can at least prepare for it. One thing you can do is to make sure you keep everyone informed about new projects and upcoming organizational reshuffles. The impact of events like that can be difficult to know in advance, but if everyone is kept well informed, they’ll be able to adapt more easily.
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 that assists with executing core HR functions in addition to 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:
Features of HCM Systems and Software
Modern HCM solutions are generally customizable and subsequently 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 HRM or HRIS technology, an HCM solution integrates payroll and HR functionality with a single employee record, so that organizations have 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 will not 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
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 detail at a granular level.
A comprehensive HCM strategy should take into account 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 sum total of all the relevant skills and experience each individual adds.
While human capital may take into account 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 seek to contain it.
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