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 human capital management. It aims to make the most of your workforce by maximizing employee productivity and engagement for a high-performance culture.

What Is Human Capital Management?

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

Effective HR functions have changed over the years, and they continue to evolve with the needs and expectations of today’s workforce. Human capital management software was originally developed and targeted for large corporations, but small businesses wanting to adopt similar, cost-effective tools saw HCM software shift to begin catering to their needs. These 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 traditional HR tasks into strategic tools that benefit both the business and employees. The essential 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 support

Each of these elements can be combined or utilized independently based on your company’s needs. An effective HCM system will be scalable and able to adapt to your organizations needs as they evolve.

Human Capital Management vs. Human Resources

HR and HCM are two terms that are often mistaken for each other. While there is overlap between the two, they are also distinctly different.

Traditionally, HR focuses on functions that provide structure and organization to the employee lifecycle as they meet a business's needs. HR establishes the basic framework and individual processes for an organization and those then become part of HCM's systemic goal to help both employees and the business thrive and grow.

Human Capital Management vs. Talent Management

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

Talent management concentrates 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. Each area of talent management is focused on solving a specific problem. Ultimately, talent management requires a system that reveals and nurtures people throughout the company's hierarchy and across departments.

Why Is Human Capital Management Important?

Without an HCM strategy, employers risk losing time and money in everything from the hiring process to benefits investments. A disenfranchised workforce can lack the loyalty, enthusiasm, and guidance that drives top performance. HR is at the epicenter of your business, and when it employs an effective 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 ahead of market trends. Consider how the following developments can impact your business

1. A Remote and Hybrid Workforce

During the COVID-19 pandemic, remote work became a widespread necessity. As social distancing restrictions were lifted, organizations faced decisions about maintaining remote work policies, bringing employees back to the office, or adopting a hybrid model. Each approach has its advantages and challenges. 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

Technology has revolutionized how employers manage operations and employee data, replacing lengthy paper records with sleek electronic systems. Employees now expect on-demand access to payroll, benefits, and automatic deposits, considering anything less to be inconvenient. The internet empowers workers to research their rights and advocate for themselves. To navigate these changes and ensure compliance with evolving regulations, having a skilled HR professional is essential for addressing employee needs effectively.

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 use workers on a contract basis, you’ll want to attract reliable, high-quality contract workers.

4. Expanding Compliance Regulations

Staying compliant with local, state, federal, and international regulations is crucial for businesses. As regulations grow more complex, timely data collection, reporting, and staying updated on new requirements are essential for smooth operations.

5. Organizational Structure

Employees are increasingly taking a team approach both within their department and across an organization. Add remote workers to the mix and it becomes essential to foster collaboration through technology that supports healthy, high-performance teamwork. Organizations must rethink how leadership, accountability, and decision-making are distributed across physical and virtual spaces. A flexible organizational structure that accommodates remote and hybrid teams can improve agility, employee satisfaction, and overall productivity.

Benefits of Human Capital Management for Businesses

Your HR team is responsible for many operational tasks, and when your core HR functions are running smoothly, employees are more likely to have a good experience while focusing 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
• Developing an effective leadership pipeline
• Performance management tactics that help manage staff reviews and develop ongoing training and management plans
• An end-to-end HCM strategy, supported by the latest in flexible and integrated HR technology
• Innovative human resource management

Challenges of Human Capital Management

Human capital management (HCM) focuses on boosting employee experience, productivity, and satisfaction to maximize their value to the business. Along the way, it can help your business face several challenges, including:

• Administration Management: Picking the right tools for benefits, time tracking, and communication can streamline processes and keep employees happy and productive. Poor choices or lack of integration can lead to inefficiencies and employee frustration.
• Talent Management: Attracting, onboarding, and retaining top talent is increasingly competitive. Ensuring continuous development and engagement across the employee lifecycle requires strategic planning and resources.
• Diverse Workforce: Managing a multi-generational, multicultural team with varied expectations, communication styles, and skill sets demands inclusive policies and adaptive leadership.
• Big Data: HR departments now handle vast amounts of employee data. The challenge lies in analyzing and leveraging this data effectively while maintaining privacy and avoiding bias in decision-making.
• Security: Keeping company data safe is critical, even down to decisions like allowing personal devices for work.
• Compliance: Navigating ever-changing local, state, and federal regulations is time-consuming and error-prone. Non-compliance can result in legal issues and financial penalties.