What Is Human Capital Management (HCM)? | Key Terms
Human Capital Management (HCM) is a term growing in popularity – but what does it actually mean? We’ve listed the key terms surrounding HCM and what it all means for your HR team.
What Is Human Capital?
Human capital is the economic value that comes from your workforce: things like experience, skills, knowledge, and abilities, as well as anything else that might add further value such as personal values, work ethic, and education. Although it’s a qualitative value, it can still be measured and used to provide a return on investment (ROI).
What Is Human Capital Management?
Human Capital Management is a set of practises that attain, manage and optimise ‘human capital’ to maximise overall business value. This might include usual HR tasks such as processes for hiring and retention, but with a focus on developing the skills, knowledge, engagement, and all the other good stuff that result in a more effective team.
What Is its Purpose?
In a nutshell, HCM recognises that employees (and everything that comes with them, as above) are a company’s biggest asset. I.e. they offer competitive advantage and economic value to the organisation. However, a workforce can also be a company’s biggest expense. With that logic, HCM drives many business practices to increase the return on investment (ROI) on their ‘human capital’.
Thinking of people as ‘assets’ can seem very cold. However, HCM can be a useful tool to consider how your people are valuable, can become even more valuable with the right support, and therefore contribute more towards your company’s growth. For example, you can increase human capital by providing training for employees, or creating a working environment more constructive to their physical and mental health, which benefits them as well.
How Is Human Capital Management (HCM) Different from Human Resource Management (HRM)?
HCM and HRM are often used interchangeably and are both related to managing your people.
However, HCM works to maximise value and ROI of human capital, whereas HRM aims to better manage the systems, processes and policies to do with hiring, training and retaining people.
Therefore HRM mainly focuses on HR processes like payroll processing, expenses, benefits, and time and attendance.
HCM on the other hand looks at the whole organisation’s strategy that is affected by its people, and therefore might encompass performance, training, and absence management as well.
What Business Is HCM Best Suited For?
Due to its nature, HCM is often used by large organisations or those with a workforce that spans several countries. However, there is still HCM Software available for small-scale organisations that are wanting to maximise ROI within their more modest team.
What Is a Human Capital Initiative?
Human Capital Initiatives (HCIs) are strategic, big-picture goals or objectives that are dependent on the people working in your business. These usually require a lot of resources.
For example, a Human Capital Initiative might be:
- Merging successfully with another company
- Acquiring or managing an international / global workforce
- Developing a new business model or supply chain
- Improving business performance
- Restructuring the team, or creating a lean management system
- Establishing an internal communications process to improve employee motivation
Once you have these goals or HCIs, they will inform your Human Capital Management System.
What Is a HCM System?
A HCM system is a set of business practises and tools that enable you to acquire, manage and develop your human capital, on a large scale. Essentially, these are the ways and means that you will achieve your goals.
HCM systems are usually big-picture and the core elements are:
- The organisations values and vision
- Strategic goals and objectives
- The leadership team, and their individual HCM responsibilities
- HCM or HR software that includes employee data management
What Does HCM Software Do?
Human Capital Management Software helps HR professionals manage their employees with ease, usually at a large scale, whilst improving employee experience and engagement. It might include features such as:
- Recruitment and onboarding tools
- Advanced payroll processing
- Evaluating performance and productivity
- Customisable analytics and reporting functionality
- Employee self-service and support
Why Is Human Capital Management Important?
Increasingly, employers are understanding their human capital is their biggest asset to their business, and they shouldn’t take it for granted. By making HCM a priority, employers can attract, onboard, develop and retain top-notch talent throughout the employee lifecycle.
Improving human capital by focusing on employee engagement, well-being, and development leads to many tangible benefits – including increased productivity, lower turnover, better product quality, and a happier customer experience.
All of these drive competitive advantage, and at the end of the day, profit for your business.