What Is Human Capital Management (HCM) & Why Is It Important?

As a business owner, you already recognize that your employees bring immense value to your company. Wouldn't you like your business to empower its people to bring their best ideas and talents to their roles? That's the purpose of HCM, or human capital management. It aims to make the most of your workforce by maximizing employee productivity and engagement for a high-performance culture. Done with care, HCM can strengthen the overall value and resiliency of your business.

What Is Human Capital Management?

Human capital management (HCM) can be described as a set of processes and tools that businesses use to systematically improve recruiting, management, and performance. The human resources function uses these tools and processes to support a well-functioning company.

What is another term for human capital management? It's easy to think that HR is another term for HCM, but that isn't the case. HCM is a systematic approach that treats employees as people whose collective experiences, skills, and attitudes bring economic value to a business and whose contributions can continue to grow and evolve.

The role of an effective HR function has changed over the years, and it continues to evolve with the needs and expectations of a rapidly changing workforce. Human capital management software was originally developed and targeted for large corporations, but an increase in small businesses wanting to adopt similar, cost-effective tools saw HCM software catering to their needs, which has created a shift. Such tools are now cheaper and easier to use for HR professionals with smaller teams who don't have the need for or the bandwidth to learn a more complex system.

What Are the Types of Human Capital Management?

HCM transforms many traditional, rote HR tasks into a set of strategic tools that benefit both the business and employees. The elements of human capital management typically include:

• Recruitment, hiring, and onboarding
• Payroll
• Time and attendance
• Benefits
• Talent management
• Training and professional development
• Analytics and reporting
• Compliance

Why Is Human Capital Management Important?

Without an HCM strategy, an employer risks losing time and money in everything from the hiring process to investing in benefits that don't serve employees’ best interests. A disenfranchised workforce can lack the loyalty, enthusiasm, and guidance that drives top performance. The HR function is the intersection of the entirety of your business, and when it employs an HCM strategy, every aspect of your business stands to improve.

Because the purpose of human capital management is to increase an employee's value to the organization, it must stay in front of market trends, making HCM incredibly important. HCM may help an employer to turn work and labor trends into opportunities. Consider how the following developments can impact a business:

1. Growth of a Remote and Hybrid Workforce

During the COVID-19 pandemic, many employees worked remotely. As social distancing restrictions were eliminated, employers tried to either keep the remote workforce policies in place or get their employees to return to the office. Others embraced a hybrid approach. There are numerous pros and cons to incorporating remote workers into a workforce. Access to remote workers expands an employer's hiring pool. Once hired, however, these workers rely on up-to-date technology, tools, and knowledge to stay connected and engaged.

2. Proliferation of Data

Not only is technology allowing employers to gather more data about business operations and employees, but what used to require reams of paper to track worker information has often been replaced with electronic data. Employee expectations have shifted as well, with on-demand access to payroll and benefits information along with automatic payroll deposits now being the norm in many workplaces. Anything less is largely considered an inconvenience. Additionally, with the internet, employees are now able to research laws if they feel they have been wronged and are more encouraged than in the past to speak up on their behalf. It's a smart business practice for employers to have a knowledgeable HR professional who can respond to and address employees' needs while upholding the most current regulatory compliance measures, which can feel like a fast-moving target.

3. Growing Gig Economy

More contract-based and freelance workers are available than ever before, and their contributions can directly impact the value of your business. If you’re looking to hire workers on a contract basis, you’ll want to attract reliable, high-quality contract workers. Additionally, it's important that your business stays compliant with local, state, and federal regulations regarding all types of workers.

4. Expanding Compliance Regulations

From the municipal, state, federal, and international levels, business regulations are growing increasingly complex. Gathering the correct data and filing reports and forms in a timely manner, all while staying abreast of new requirements, is a necessary part of running a business.

5. Organizational Structure

Increasingly, employees are taking a team approach both within their department and across an organization. Add remote workers to the mix and they need technology that allows them to communicate and interact in ways that nurture healthy, vibrant, and high-performance teamwork.

Human Capital Management vs. Talent Management

Although they are often used interchangeably, there is a difference between human capital management and talent management. HCM is an overarching strategy that combines business intelligence and management activities to make the most of a company's human capital. Talent management is one component of a company's HCM strategy.

Talent management also concentrates on a company's people, but it's more focused on the day-to-day activities needed to ensure the success of a company's HCM strategy. Specific activities may include recruiting, leadership development, succession planning, compensation management, and performance management. The underlying components of talent management are how to recruit, retain, promote, and train workers.

Each area of talent management is focused on solving a specific problem. What are you doing to manage performance reviews? What type of candidate is the best fit for this sales manager role and how do you find them? How do you improve your overall recruiting process? What kind of training do your leaders need? Ultimately, talent management requires a system that reveals and nurtures people throughout the company's hierarchy and across departments.

What Is the Difference Between HR and HCM?

HR and HCM are another two terms that are also often conflated. While there is overlap, they are distinct. Traditionally, HR focuses on functions that provide structure and organization to the employee lifecycle as they meet a business's needs. These functions typically include:

• Talent acquisition and management
• Payroll
• Benefits administration
• Compliance
• Training and development
• Workplace safety

To summarize, HR establishes the framework and individual processes that are part of HCM's goal to help employees and the business thrive and grow.

Benefits of Human Capital Management for Businesses

Your HR team is responsible for personnel management, payroll, benefits administration, and other operational tasks. When your core HR functions are running smoothly, employees are more likely to have a good experience and can focus on their job responsibilities.

Having the right tools in place also enables your HR team to manage the diverse operational aspects of their job, while devoting energy to higher-value human capital management strategies. These may include:

• Identifying the right talent during the recruiting process;
• Supporting and managing employees throughout their careers; and
• Developing an effective leadership pipeline.

Performance management tactics help identify leaders, manage staff reviews, and develop ongoing training and management plans that aim to help each individual excel. Clearly identifying potential leaders can aid in business and succession planning, allowing you to promote from within and capture the full value of your investments in employee development and growth. An end-to-end HCM strategy, supported by the latest in flexible and integrated HR technology, forms the basis of a high-performance corporate culture.

Innovative human resource management requires the right overarching strategy, processes, and technologies to address a company's unique needs.

Challenges of Human Capital Management

In its pursuit to maximize the value an employee brings to the business, HCM is concerned with overall employee experience, productivity, and satisfaction. In this effort, there are an array of challenges that human capital management must tackle, such as:

• Administration management: Choosing the right technology and systems for administrative processes regarding such topics as benefits management, time and attendance, and internal communications can increase efficiency and help employees be more productive and satisfied in their roles.
• Talent management: From recruiting to onboarding to training and professional development, throughout an employee's tenure there are countless opportunities to help a worker grow in their role.
• Diverse workforce: To unlock the full potential of people, an employer needs a strategy that works with today's multi-generational workforce comprised of people with different backgrounds, cultures, skills, and experiences.
• Big data: As the amount of data HR manages continues to increase, HCM is charged with finding ways to use it to do everything from optimizing benefits to providing a competitive compensation package.
• Security: Staying current with the practices and technologies that safeguard your company's data is of utmost importance. Even the decision on whether an employee can use their own device is a security decision that can impact productivity.
• Compliance: Staying up to date with local, state, and federal regulations is a key to avoiding costly penalties.

Choosing an HCM Vendor: What Data Should Be Reviewed?

To develop effective human capital management systems and choose the right solution for your needs, business leaders should set goals for each of the core business processes managed by the HR team, then discuss how a human capital management program will target each of those goals. Leading HCM solutions share several features designed to help businesses quickly implement the program within existing company processes:

• Integration features help ensure that HR software communicates in real-time with other business systems, allowing key decision makers to have immediate access to accurate data.
• Employee self-service features can reduce administrative burdens on staff and decrease costs while improving the employee experience.
• A cloud-based, modular approach allows companies to modify the system as their needs develop over time, such as adding new features or eliminating ones that are obsolete.
• Strong support features give business owners peace of mind by offering 24/7 assistance not only for the initial setup and implementation but also for ongoing issues or questions.

HR departments are under pressure to make strategic decisions, and having the proper tools to gather and analyze this information efficiently is the cornerstone of a solid talent management program. Using data and reports to identify weak spots, then taking steps to improve can go a long way in setting a business apart from its competition. For instance, half the respondents from the 2022 Paychex Pulse of HR Survey said their organizations are not effective at hiring, onboarding, and retention. This reveals a potential opportunity for improvement and good data can lead the way. From tracking progress to informing future planning, data and analytics may provide a sound foundation for unrolling a strategic human capital management effort across the organization.

What Is Human Capital Management Software?

HCM software is the aggregated suite of technologies used to manage and automate the many functions and processes used to organize and oversee an employer's workforce, from a person's first interaction with the business to their last day on the job. A business can install HCM software on its own server or hard drive or opt for a cloud-based HCM system. Additionally, a business can purchase different apps and functionalities from various vendors or use a unified system under a single service provider. There are many benefits of HCM software, including increased efficiencies, cost savings, fewer errors, and more robust data collection coupled with easier access to the right data.