What is Human Capital Management: A Complete Guide

Human Capital Management (HCM) encompasses the strategic process of recruiting the right talent, efficiently managing workforces and enhancing productivity levels. The paradigm of human capitalization has shifted from its traditional administrative roots to become a key driver of business value.

By redefining the conventional roles within human resources (HR) departments—such as recruitment, training, payroll, compensation and performance management — Human Capital Management leverages these functions as catalysts for creating engagement, amplifying productivity and ultimately, spiking business value.

Human Capital Management: A Brief History

The concept of “human capitalization” emerged in the 1950s and 60s alongside the rapid advancement of technology which accelerated the automation that started in the industrial age. During this period, economists and business professionals began to recognize employees not merely as resources, but also as skilled workers with unique talents who were capable of driving business expansion.

The term regained prominence during the late 1990s with the advent of the internet. The rapid proliferation of new technologies led to the automation of diverse business processes, thus, reshaping how employers and managers collaborated and operated.

This era could aptly be dubbed as ‘The Golden Age of HCM HR’. Advancements in digital technologies empowered HR leaders to deliver a more immersive and tailored employee experience on a larger scale.

Eventually, the emergence of cutting-edge technologies like data automation, predictive analytics, and artificial intelligence (AI) introduced innovative solutions for understanding, managing, incentivizing and engaging the workforce. Today, HR leaders have an array of tools to optimize the value derived from their workforce by utilizing comprehensive Human Capital Management strategies.

Definition of Human Capital Management

Instead of merely assessing the expenses associated with workforce maintenance, Human Capital Management focuses on optimizing the inherent value of human capitalization.

Gartner defines HCM as “is a set of practices related to people resource management. These practices are focused on the organizational need to provide specific competencies and are implemented in three categories: workforce acquisition, workforce management and workforce optimization.”

Importance of Human Capital Management

Human Capital Management addresses the most crucial investment that any organization can make – in its people. Here are some key reasons why it’s so important.

1. It Optimizes Talent Placement:

Hiring the right people for the right roles is imperative. Human Capital Management enables identifying employees’ strengths and competencies to ensure that they are aligned with roles that capitalize on their skills and talents.

2. It Enhances Workforce Productivity:

By investing in targeted training programs organizations can nurture specific capabilities that can successfully align the workforce with its objectives. HR Human Capital Management fosters productivity by placing employees in roles where they can excel, thus improving overall efficiency.

3. It Streamlines HR Operations:

HCM streamlines HR processes by integrating disparate systems, leveraging analytics for informed workforce decisions and automating manual tasks, which in turn, accelerates operational efficiency.

4. It Drives ROI:

Efficient HR Human Capital Management systems improve performance management while also simplifying processes, reducing costs and improving revenue by amplifying return on investment (ROI).

5. It Encourages Employee Development:

Another important facet of Human Capital Management is that it offers comprehensive training to enable employees to deliver their best performance and chart their career trajectory. By identifying skill gaps through surveys, performance evaluations and other feedback mechanisms, HCM in HR facilitates robust employee development and career planning.

Challenges of Human Capital Management

In general, motivating employees to give their best is not easy. However, certain areas are especially more challenging as per HR leaders.

Despite its critical importance, measuring and enhancing employee engagement remains a tough task for organizations. It requires various approaches including the use of collaborative tools and employee surveys and refining of key processes like onboarding.

• Leadership development calls for continuous efforts to identify employees’ leadership potential and offer them effective training.
• Compensation and benefits require organizations to get accurate, comparative industry data to calibrate their packages and remain competitive.
• Succession planning demands foresight into future organizational shifts, which are often buried under immediate demands.
• Learning management impacts various aspects of human capitalization. Outdated learning systems often clash with modern training platforms, posing challenges in curating impactful learning content.
• Employee retention is often a big challenge for many companies. Enhancing employee retention calls for a very comprehensive and solid HR Human Capital Management strategy.

Essential Functions & Components of Human Capital Management

HR Human Capital Management offers a structured approach to enhance the performance and efficiency of the company’s workforce by providing a comprehensive strategy for talent attraction. These strategies mainly consist of the following aspects:

1. Talent Management

Nurturing employees to develop new skills and enhance their performance is the essence of talent management. It is a continuous process that begins with the initial interaction between a candidate and the company and evolves throughout their tenure.

2. Recruitment and Hiring

Attracting and hiring talent that aligns with organizational goals is the most important aspect of Human Capital Management. It equips HR departments with the necessary tools to position the organization as an attractive employer and streamline the recruitment process effectively.

3. Onboarding and Training

Effective human capitalization requires seamless onboarding processes for new employees. These are essential to acquaint new hires with the company culture, job requirements and expectations. Additionally, HR Human Capital Management focuses on training employees to optimize their performance for the organization.

4. Benefits Management

Human Capital Management simplifies the complex task of managing workforce benefits, facilitating easy planning and decision-making. Once benefit plans are set up, HCM HR streamlines enrolment and deductions throughout the system, while ensuring efficiency and accuracy.

5. Time, Attendance, and Payroll

Efficient management of schedules, work hours and leave are crucial for payroll accuracy and compliance. HCM in HR processes streamline tracking and management of on-the-job hours, leave applications, security requirements and automate payroll processes for enhanced efficiency.

6. Employee Self-Service

HCM in HR provides self-service application and tracking systems for various HR functions, including time and attendance management, HR help desks and employee and manager self-service portals.

7. Reporting and Analytics

Human Capital Management offers a wealth of actionable insights through comprehensive databases. Data from performance reviews, turnover rates, benefits claims and other metrics enable organizations to refine their practices as they enhance the work environment to achieve business objectives effectively.

Why Organizations Should Use Human Capital Management

Human Capital Management ensures organizations meet labor demands and empower employees through recruitment, onboarding, development and retention activities. Here are some key reasons why organizations must use HCM:

• It enhances Human Resource Management systems: Human Capital Management aligns organizational structure, strategy and objectives while aiding in workforce management and talent identification for reduced turnover.
• It streamlines recruitment: Human Capital Management helps in sourcing top talent via AI-driven software, social media and employee referral programs. Efficient applicant tracking systems can manage candidate pools and streamline onboarding and training.
• It helps in identifying talent gaps: Human Capital Management identifies talent needs and skill gaps. This empowers HR teams for strategic talent sourcing and skill enrichment programs to address expertise shortages.
• It boosts employee retention: Human Capital Management identifies employee preferences through performance reviews and feedback, creating tailored benefits and opportunities for improved retention.

HCM vs. HRMS & HRIS

Human Capital Management or HCM is frequently mistaken for other HR terms like HRMS. However, it actually stands apart as a different concept.

HCM encompasses both HR processes and a category of software. On the other hand, Human Resource Management System (HRMS) refers to a suite of integrated software applications primarily focused on managing core administrative tasks like employee records, payroll, and benefits.

While HR professionals may mention “installing an HRMS”, software vendors typically prefer using HCM to describe their suites, which is more prevalent. HRMS is closely related to the term Human Resource Information System (HRIS), which is sometimes used interchangeably. HRIS often refers to the core administrative system and is favored by IT teams within HR departments.

Of the three, HCM serves as the broader umbrella term for HR software and is commonly used by vendors.

How Can Human Capital Management (HCM) Technology Help Your Organization?

HCM technology offers a platform for strategic workforce optimization, enabling an organizations to:

• Make informed data-driven decisions: With the help of predictive analytics and forecasting, organizations can enhance decision-making related to compensation, work schedules and more.
• Foster business growth: Through adaptable, cloud-based solutions, organizations can manage increased employee numbers, transactions and data.
• Enhance profitability: Automated workflows can contribute towards replacing manual tasks. This can, in turn, lead to reducing direct labor costs and administrative expenses.
• Optimize talent strategies: By using technology such as chatbot-assisted applicant screenings, multimedia-based training and mobile self-service options, organizations can enhance talent attraction and retention efforts.
• Ensure data security: Enhanced multi-layered protection and security alerts can help safeguard against data breaches and fraudulent activities.
• Ensure regulatory compliance: Organizations can leverage global and local monitoring capabilities to stay abreast of evolving regulations, ensuring compliance at all levels.

What is the Future of Human Capital Management?

Technology is undoubtedly reshaping the corporate realm. And in this evolving paradigm, Human Capital Management is also undergoing rapid transformation. There is a surge in the use of technologies like Software as a Service (SaaS) and mobile solutions, alongside cutting-edge innovations ranging from machine learning to artificial intelligence (AI).

• Mobile technology is increasingly enhancing engagement and productivity by providing HR teams, employees and managers with intuitive, self-service mobile applications.
• Social platforms are facilitating collaboration among peers and mentors, thereby boosting productivity across the board.
• AI-powered chatbots have found a growing use in streamlining interactions by swiftly and efficiently addressing queries from various stakeholders.
• AI is complementing human capabilities by automating tasks such as sifting through extensive resumes and data points to identify the most suitable candidates.

Wrapping Up

Human Capital Management is fundamental to your organization’s success. Using systems to manage employees is an option, but opting for a comprehensive solution, like Akrivia HCM, to oversee all facets of the employee life cycle can significantly save time and enhance your workforce’s productivity.

From core HR processes to performance management, Akrivia’s extensive solution can combat all your HR woes and while promoting efficiency. To know more, request a demo today.