What is human capital management (HCM)? Definition and best practices
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Published 7:29 a.m. UTC Dec. 13, 2023
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Human capital management (HCM) is the process an organization uses to recruit, manage, develop or optimize employees to improve workforce productivity. It involves hiring the right employees, aligning employee performance with business goals, increasing compliance regulations and encouraging team-based work structures.
Human capital management focuses on adding value to company employees. To achieve successful business results, the involved employees must have proper incentives as well as healthy workplace experiences. HCM addresses issues related to human resources, compensation and other interpersonal relationship-related issues. Its practices can help create a healthy company culture.
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What is human capital management?
Human capital management is the strategic approach an organization takes to manage the well-being of their current workforce and to continue motivating them to achieve their highest potential. This involves encouraging their skills, knowledge and capabilities.
“Best practices in HCM involve optimizing talent acquisition, development and retention to maximize overall organizational performance,” said Philip Portman, CEO of Textdrip. HCM focuses on the long-term development of employees, while human resources (HR) focuses on the day-to-day management of people.
Why is human capital management important?
Improves human resource processes
Human capital management provides an improved framework that HR departments can use to attract exceptional employees and to retain this talent to achieve the goals of the organization.
Human capital management keeps track of project progress, which in turn helps businesses accomplish their long-term objective. Human capital management improves the human resources process by consolidating HR systems and leveraging these analytics to make more impactful business decisions.
Helps identify employee capability gaps
Conducting performance reviews and other feedback systems helps identify which gaps in employee capabilities need to be filled. Gaps in employee capabilities can help guide the hiring process for the company. HR can hire according to skills that would help advance the company’s results.
Improves organizational structure
With improved employee attitudes and output, there is a growing demand for more autonomy and decision-making opportunities. Human capital management allows organizations to tailor roles or positions to the employee’s skills. As employees become more responsible for their output, companies often restructure their organizational hierarchy to focus on higher-priority tasks than micromanaging employee work.
Components of HCM
Human resources strategy
HCM is a much more people-focused approach to HR, which integrates many processes such as:
- Recruiting
- Onboarding
- Payroll
- Benefits
- Performance management
This provides a much more holistic view of employees, which in turn helps the organization motivate them and keep them accountable.
Recruiting and talent management
Human capital management portrays employees as an asset that must be nurtured so that they can provide value to the company in a measurable way. This goal is reflected in recruiting efforts. HCM principles allow the organization to hire for skills that will further the company and are currently missing in the workforce.
Workforce management
HCM software allows employees to streamline and automate tedious tasks, which saves time and allows for better allocation of effort. As HCM keeps track of employee data, it provides insight into how they prefer to be led and developed.
Compensation and benefits management
Certain human capital management software supports compensation and benefits management within the platforms, making it easier to keep track of these transactions and better align relevant choices with the companies’ HCM goals.
When considering a compensation and benefits strategy, it is important to refer to the HCM goals of the company, such as attracting and retaining talent, promoting employee well-being or fostering diversity and inclusion.
HCM tips and best practices
When executed correctly, human capital management converts traditional processes — such as recruiting, training, performance management and compensation — into opportunities that improve the productivity and output of a company.
A few best practices of human capital management include:
- Building an inclusive and diverse workforce.
- Focusing on cultivating leadership within the company.
- Retaining successful talent.
- Establishing a healthy corporate culture.
Top human capital management software
Human capital management software is a collection of HR systems that use mobile and cloud-based technology to process data, run reports and create a smooth end-user experience. Companies can take advantage of HCM software to make the HCM process more efficient and beneficial to the company and its employees.
Another perk to HCM software is that it ensures company compliance by automating essential processes like workflows, checklists, reporting, filing and documentation. Deploying a cloud-based HCM system nurtures organizational growth because they are easily scalable to help recruit and develop top talent while providing control over company expenses.
These software providers tend to innovate often to allow for continuously enhanced usability. In addition to looking at price, features, scalability and innovativeness, it is important to select an HCM software that is known for its data security feature to protect your company data and reduce its liabilities.
Monday.com
Monday.com is a powerful project management system. More importantly, it is a powerful human capital management software. The software offers tracking features for tasks, issues and projects through views like kanban boards and calendars.
It supports collaboration through the ability to invite your team members to a project, then you can boost team productivity by highly customizing workflows. Monday also provides reliable project organization and management. It allows teams to organize their project information, resources, schedules and tasks into one workspace. The platform also offers client work tracking to help you ensure timely work execution and client retention.
SAP SuccessFactors
SAP SuccessFactors includes a human experience management (HXM) suite, which includes modules such as recruitment, talent management, time tracking and data-driven insights that help organize company processes. SAP offers AI-powered experiences which provide companies with resources that will make their HR teams stronger.
- SAP recommends learning and development modules personalized to each employee depending on their role, project or team.
- With the AI tool, HR teams can analyze and forecast trends, which allow for an accurate assessment of workforce gaps.
- The AI copilot feature provides assistance through live chat.
Using SAP, compliance can be automated so that your company is up to date on regulations at all times. Overall, it is a well-rounded HCM platform with features that are scalable and customizable.
ClickUp
ClickUp is a project management software that is ideal for individuals and small businesses. The system offers a variety of tools that optimize business processes, such as document storage, chats, whiteboards, automations and repeatable workflow templates. ClickUp is known for its customizable workflows and progress-tracking tools, which makes it one of the best project management software in the market.
Featured payroll software offers
OnPay
Monthly fee
$40 per month plus $6 per employee
Direct deposit
Yes
Rippling
Monthly fee
$35 per month + $8 per user
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Yes
Gusto
Monthly fee
Starting at $40 plus $6 per month per employee
Direct deposit
Yes
SurePayroll
Monthly fee
$29.99 per month plus $5 per employee
Direct deposit
Yes
Frequently asked questions (FAQs)
“An HCM system will help you automate and scale parts of the processes and provide valuable data, but focusing on human interaction is how employers can improve human capital management,” said Anna Gullstrand, the Chief People and Culture Officer at Mentimeter.
To optimize human interaction, it is important to develop an internal communication strategy. It is also important to gather feedback on any company-side changes implemented to have a better understanding of what employees find helpful to remain productive.
Successful HCM focuses on employee experiences and attempts to better understand how to accommodate their preferences.
There are a few common challenges when implementing human capital management. One of them is talent acquisition and onboarding. Identifying and acquiring the right talent should be a priority for organizations.
However, this process requires filtering applications based on predetermined criteria, identifying recruiting events, participating in said events and using tools to measure employee performance. These steps may be tedious, but they provide a strong foundation for a successful business.
Another challenge presents itself in employee training and development efforts. It is important to continuously nurture employees and provide them with opportunities to improve. Employees who are continuously learning and expanding their skill sets will feel more engaged with their roles and committed to their employer.
HR focuses on developing and managing systems that improve employee performance. HCM focuses on maximizing employee output and value addition to an organization. HR functionalities add to the goals of HCM.
“Successful HCM can be achieved by aligning your talent strategy with your business goals. This is done by hiring the right people, taking care of them and developing their skills to fill talent gaps and propel the company forward,” said Kamil Bajolek, innovation and growth-driven director in the e-commerce and fashion industry.
Human resources information system (HRIS) stores employee data and helps with all basic HR functions. HRIS helps maintain, manage and process detailed employee information, which can be very useful for analytics that help executives make business decisions during the hiring process. Efficient HRIS tools not only store employee information for bookkeeping reasons, but they also help standardize HR tasks and processes.
In contrast, HCM refers to the complete collection of tools that are designed to improve employee experience and output.
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