What Is Human Capital Management?

What is human capital management and how does it differ from HR?

While the terms “HCM” and “HR” are often used interchangeably, they have different meanings.

• HR focuses on traditional core employee management functions for an entire organization. These include hiring, job and position management and administrative upkeep. HR creates and manages the way a company acquires and trains talent.
• Human capital management can encompass the above processes while aiding in talent and workforce management. HCM systems tend to maximize the value and return on investment (ROI) of each employee.

These are some important strategies of HCM:

• Recruiting
• Onboarding
• Training
• Payroll processing
• Employee benefits
• Retirement services
• Talent management
• Reporting and analytics
• Compliance

According to Hartsock, a simple way to look at it is to think of HCM as the overall driving force behind employee and organizational excellence. “Seeing the whole picture of the organization and thinking of employees as assets who work in a synchronized manner to achieve business goals over time, adapting to market needs, is a critical part of HCM,” Hartsock explained. 

What are the administrative elements of HCM?

Human capital management includes many moving pieces that cross over into different areas within an organization. Broken down by life cycle, here are the elements of each:

Recruiting potential talent

HCM makes the hiring process easier for organizations by increasing the speed at which it recruits prospective candidates and improving the quality of its prospective hires. For example, it can increase engagement with work-life balance solutions that motivate candidates and show them the organization looks out for its employees. 

Companies entice candidates not just by sharing their list of benefits and work-life balance, but by informing them of how the company invests in employee professional development. “In a competitive labor market, attracting and retaining top talent is essential for sustained success,” said Renee Barber, global director of recruiting for TYR Talent Solutions. “HCM helps businesses build and maintain a high-performing workforce.”

Engaging current talent

HCM practices also offer current employees administrative support. This can include workflow, benefits, payroll, information technology (IT) and other types of management. Unlike standard HR practices, a company’s HCM is unique to the organization and the employees who work there. HCM also streamlines these operations to make them more efficient. 

By leveraging analytics, HCM software enables businesses to make informed decisions about the work culture and employee behavior. This helps to shape a more supportive and positive workplace, which, as Barber pointed out, can drive business growth and employee satisfaction. 

Optimizing and developing talent

Once someone new is in the building, they shouldn’t be forgotten about. Managers typically meet with their employees regularly to discuss their career development goals and how they’d like to progress within the company. From these conversations, managers work with the employee to create realistic goals and career paths. HCMs can help that happen by offering training and educational resources to further staff development. HCMs also start the discussion about total compensation and rewards so the burden isn’t placed solely on the employee.

“Regarding investing in an employee’s personal development, mentor programs, executive coaches and leadership development programs all are part of the value proposition of working for your organization,” said Stephen Kohler, CEO of Audira Labs. “Any company concerned about retaining their most talented employees must figure out how to navigate this reality if they want to continue to retain and attract top talent.”

What is HCM software?

Organizations can use HCM software to implement talent management and optimization systems within a company. HCM software differs from HR management systems (HRMS) and HR information systems (HRIS) as it caters to workplace efficiency and development over collecting demographic information. While HCMs, HRMSs and HRISs differ, the systems can support a similar range of functions, like payroll, employee self-service and benefits administration, depending on the vendor.

HCM software can customize and automate the functions your organization needs to maximize employee efficiency. The application can record, organize and store employee data to help you make data-driven decisions about each employee’s productivity. Software managers can add and monitor specific goals and record the employee’s benchmarks to show their progress. Other functions include talent management, applicant tracking, onboarding new hires, internal training and attendance monitoring.

What are the benefits of HCM software?

Implementing HCM software equips businesses with access to powerful tools and insights to support their staff and improve the workplace overall. This comes with a host of benefits, including the ability to: 

Make data-driven decisions

HCM software allows companies to take the employee data they have gathered and use the analytics to make well-researched business decisions. This could save money in the long run, as companies are not throwing money at unproven ideas.

Used effectively, this data can also uncover opportunities for employee growth and development. “Use your evaluation processes, PIPs [performance improvement plans] and other tools to support upskilling and hiring, rather than using [them solely] punitively,” recommended Hartsock. “This approach promotes growth and continuous improvement within your workforce.”

Increase employee satisfaction

Employees will be more productive and happier if business decisions are being made based on their development. With software that supports development goals and encourages professional development, employees will feel the company values them and is invested in their work.

“As industries evolve due to technology, globalization or changing work dynamics, HCM enables companies to reskill or upskill employees to remain competitive,” Barber explained.

Improve retention rates

Employees stick around longer when they feel as though they have a stake in the company. Having HCM software track development and provide education for employees promotes staff retention, therefore cutting down the cost and time involved in hiring new employees.

As Hartsock points out, retention starts with the right people. A poor fit can lead to underperformance and dissatisfaction, making it critical to align roles — whether for potential candidates or existing employees — with their strengths. “Aim to attract workers who are eager to learn and ensure they are in the right roles to thrive,” Hartsock said. “By identifying and nurturing potential, you can plan for apprenticeships and upskilling, fostering a culture of lifelong learning.”

Improve company culture

As the saying goes, a rising tide lifts all ships. So, when all employees feel valued, the company culture becomes better. Employees will be more engaged with the company, increasing their efficiency and ability to collaborate. Internal companywide communication may improve as a result of both positive mindsets and better processes.

“HCM aligns workforce planning with business strategy, ensuring employees possess the skills and competencies needed to drive innovation and growth,” Barber said.

Simplify company processes

HCM software helps businesses prepare for long-term growth by streamlining essential processes like compliance management, compensation practices and succession planning. As Barber noted, this software enables organizations to identify and prepare future leaders, ensuring continuity and seamless transitions for new roles. 

Hartsock highlighted another process HCM software can support: simplifying skills mapping. “Skills mapping (e.g., ‘What skills do people have now and what will they need in a year from now?’) is crucial not just for addressing today’s needs, but for anticipating future demands,” Hartsock added. 

Implement all-in-one scheduling and payroll

Managers no longer have to focus their time on scheduling and running payroll. With HCM software, they can automate tedious, time-consuming manual tasks. “HCM goes beyond payroll and benefits — it’s about developing talent, fostering employee engagement, enhancing performance and aligning individual contributions with the company’s overarching goals,” Barber said.

What are the potential drawbacks of HCM software?

While integrating HCM software can make your employees more productive and efficient, there are potential drawbacks to consider.

Cost

The cost of HCM software can vary, reaching as high as $300 per employee. For smaller companies, the price ranges from $40 to $100. You should make sure you have the funds within your budget to afford these systems for the long term.

Risk of a data breach

As with any computer system or application that collects employee data, there is a risk that hackers can access the information. While a security breach could be consequential, there are stringent security measures your company can take to keep your HCM data safe.

ROI for cost and time

HCM technology adoption could have a long ramp-up before launch. With the large per-employee price point, you may be paying high costs before getting your return on investment. Discuss with your IT and internal team how long the software will take to implement, what the financial burden of a long launch would be and how the problems the HCM software solves outweighs both.

What to look for in HCM software

Picking the best HCM software for an organization comes down to a team’s needs. Make a checklist of requirements so you know what you specifically want in an HCM system. There are several factors you should evaluate when researching which HCM software is best for your business:

• Price
• Compatibility
• Increased productivity
• Adaptability for all users
• Talent strategy support
• Actionable data insights
• Technological ecosystem connectivity
• Compliance support

When deciding on which HCM software to use, you should also consider the following questions.

Will this software grow with the company?

Most companies are not building their internal systems from scratch, so they’ll have to integrate their HCM software with their existing system. Pay attention to the technology requirements of the software you are looking into.

Can it be customized to fit our unique needs?

Every business is different, so some HCM software becomes a better fit than others. Most of the time, the best HCM software can be customized and fits specific industries and businesses.

Does it align with our budget and goals?

With different budgets and goals, a complex HCM system may not be the best bet – financially or in practice – for every business. Some smaller companies may find they cannot afford more robust agency software packages, but they also may not need all of the features included in that package.

How to incorporate successful HCM into your business

When implementing an HCM system, start by examining your existing processes and organizational culture. Identify critical business needs and workflows to ensure you choose the right system for your business. “Get back to basics and think like a startup,” Hartsock said. “Think of HCM as a philosophy and a leadership-in-action approach that the company needs to thrive in today’s era rather than a series of boxes to check off.”

Next, secure buy-in from employees by communicating openly about the HCM software. Highlight its purpose and benefits, address questions and concerns and involve employees throughout its implementation. Offer regular training sessions to help staff familiarize themselves with the software and maximize its potential and schedule ongoing as needed to address any changes or updates. 

Barber recommended tailoring your HCM strategies to your employees’ needs and company culture, using metrics like employee engagement or turnover rates to measure success. Keep in mind that different strategies may be more effective with different teams and be prepared to adapt them as needed. “Businesses and markets are constantly evolving and so should your HCM strategy,” Barber said. “Avoid rigid, outdated practices that may stifle innovation. Your HCM strategy should be flexible and adaptable to changing business needs and employee expectations.”

Miranda Fraraccio contributed to this article.