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Human Capital Management (HCM): Purpose, Functions & Impact

By: | July 12, 2023 25 min read

human capital management cover banner

“People are our great asset.” – Said every CEO, ever.

Human capital is one of the greatest assets in the world and, when managed correctly, can bore outstanding results. On the same note, organizations that value their employees usually reach their goals faster and more efficiently.

When a company or organization effectively manages its people and resources, it leads to more innovative ideas, equal opportunities, increased productivity, and active participation from all individuals. This ultimately boosts the overall growth of the organization.

Human Capital Management (HCM) aims at achieving similar objectives. It is all about how an organization takes care of its people. A good human capital management system helps the company grow and achieve its goals while keeping its employees happy and motivated.

This article will explore the functions and various aspects of this system. It will discuss how to choose a proper HCM system for organizations to manage their employees effortlessly while maximizing profit.

Human Capital Management (HCM) Meaning

Human Capital Management or HCM refers to the practice where organizations strategically manage their workforce’s skills and experience to maximize performance. Simply put, it’s about taking care of your team and ensuring they have what they need to help the company succeed.

As suggested by Keans, 2005, HCM is mostly about the value of the organization. It involves collecting, analyzing, and sharing data to guide important decisions about managing people effectively. It helps leaders at all levels of the company make smart choices about how to add value, both strategically and in day-to-day operations.

What is HCM (Human Capital Management) Software ?

An HCM software is a suite of digital tools and technologies that help organizations manage day-to-day employee functions. It automates HR operations to seamlessly handle manual administrate work in an organization.

Think of HCM software as a one-stop digital system that handles everything related to employees. From hiring and training to tracking performance and generating reports, it’s a centralized hub where all employee-related tasks can be managed efficiently.

Some examples of Human Capital Management software are:

  • Keka
  • People Strong
  • Zing HR
  • Zoho People

How is HCM different from HRM (Human Resource Management)?

HCM differs from HRM in terms of HR functions like administration, management, and contribution to the organization’s success. While HRM focuses on administrative tasks like payroll, benefits, and compliance, HCM takes a broader and more strategic approach. It goes beyond the day-to-day operations to align management practices with long-term organizational goals.

hrm vs hcm infographic

FactorHuman Capital Management (HCM)Human Resource Management (HRM)
FocusGenerate economic value for the organizationPeople management
ScopeBroad and comprehensiveLimited to HR administration
Employee DevelopmentSkills and talent managementCompensation and benefits management
Organizational AlignmentFocuses on organizational designEmphasis on organizational culture
Data & analyticsDecision-making, developing policies, and maintaining themReporting and compliance
Business ImpactDrives organizational performance and growthSupports efficient HR operations

Purpose and Importance of Human Capital Management

The purpose of HCM is based on 3 main principles:

  1. Communication Principle: Using proactive communication strategies to interact with an organization’s employees in a respectful and professional manner. Additionally, treating them as responsible adults following policies and procedures.
  2. Flexibility Principle: Recognizing employees’ needs according to other kinds of societal pressures in association with the organization’s requirements.
  3. Consultability Principle: Acknowledging that employees are rational individuals with their own ideas and opinions. This can bring mutual benefits to both the employer and the employee.

Based on these principles, HCM takes the usual HR tasks like hiring, training, and managing pay and performance, and turns them into chances to boost employee engagement, productivity, and overall business success. It’s about using these processes to create value and make the organization thrive.

The overall purpose of HCM has been outlined as follows

  • HCM uses evidence-based HRM for informed decisions
  • HCM benefits all stakeholders.
  • Evaluating and reporting human capital is crucial for performance.
  • HCM enables fact-based analysis and policy development.
  • The human capital approach provides valuable insights and transparency.
  • It reveals the value of effective people management for organizations and stakeholders.

Elements of Human Capital Management

  1. Elements of HCM
  2. Intellectual Capital
  3. Social Capital
  4. Human Capital
  5. Organizational Capital

elements of human capital infographic

The elements of Human Capital Management (HCM) involve practices and strategies for managing and leveraging the workforce. HCM goes beyond HR functions and focuses on optimizing the intellectual, social, human, and organizational parts of it. The 4 key elements of HCM are as follows.

1. Intellectual Capital

Intellectual capital represents the valuable knowledge assets that an organization possesses. It includes the knowledge and expertise that people bring to the table. It also contributes to the overall value of the organization.

2. Social Capital

Social capital consists of the knowledge that comes from the relationships you have within and outside the organization. Think of it as the connections, trust, and shared objectives that allow people to work together effectively. These structures and networks enable you to acquire and develop intellectual capital through the knowledge you gain from those relationships.

3.Human Capital

Human capital represents the invaluable skills, knowledge, and potential of individuals within an organization. It encompasses the collective talent that contributes to the organization’s growth and success.

4.Organizational Capital

Organizational capital is the valuable knowledge that an organization possesses. It is stored in databases, manuals, and other resources, and is often referred to as “structural capital.” This knowledge is an important part of the organization’s intellectual assets.

Key Benefits of Human Capital Management

Research done by Techjury on HR statistics suggests that the HR software market currently holds a value of more than $13.8 billion, and it is projected to grow significantly. Predictions indicate that the global HR market will reach a whopping $38.17 billion by the year 2027.

The same research signifies that 58% of companies rely on HR technologies like to attract and retain talented individuals for their workforce. Companies have begun to understand the benefits HCM provides and invest in it more. Here are 5 key benefits of it:

1. Adds value to the organization

In any market, success relies on delivering value to clients through innovative strategies, technologies, or unique offerings. HCM fosters a team that is committed and open to fresh ideas, thus contributing to the value of the organization.

2. Creates an environment of growth

It is crucial for companies to create an environment where employees can grow and develop, just like money in an interest-bearing account. This growth is manifested through an HCM system by creating a development mindset within the organization.

3. Diversifies organizational resources

HCM helps diversify resources by developing a workforce with unique skills and knowledge. It assists with obtaining customized and unique resources. This creates a competitive advantage as the organization possesses capabilities that are not commonly found among other firms.

4. Immobilizes resources

HCM contributes to resource immobility by creating a culture, processes, and systems that are difficult for competitors to replicate, giving the organization a distinct advantage.

5. Promotes sustainable success

HCM attains enduring success through a specialized workforce and distinctive work environment that is challenging for rivals to duplicate, thereby securing a sustained competitive edge.

Functions of HCM

Human capital management consists of a wide range of functions. Some of them are:

  • Recruitment: HCM utilizes applicant tracking systems to find and hire new employees by posting job ads and managing candidate applications. This makes the hiring process easier and faster. 
  • Onboarding: It guides new employees through their initial days by providing important information and training materials. It also introduces them to the team, helping them feel welcome and prepared for their new role. 
  • Payroll: HCM calculates employees’ salaries, deductions, and taxes accurately and ensures they are paid on time, simplifying payroll management for the organization. 
  • Time and Attendance: It can track employees’ work hours, breaks, and time off, making it easier to manage schedules and ensure accurate attendance records. 
  • Benefits and Retirement Services: It helps employees understand and enroll in company benefits, such as health insurance and retirement plans. It provides them with valuable support and information.
  • Talent Management: HCM assists in evaluating employee performance, setting goals, and planning career development. It also helps organizations nurture and retain talented individuals. 
  • Training: It provides training programs and resources to enhance employees’ skills and knowledge, enabling continuous learning and professional growth. 
  • Reporting and Analytics: HCM generates reports and analyzes data on workforce trends, such as employee turnover and productivity, aiding in informed decision-making and strategic planning.
  • Compliance: HCM helps organizations adhere to labor laws and regulations by ensuring accurate record-keeping and managing employee documents. It also facilitates compliance with HR policies.

Human Capital and Talent Management

Talent management is a subset of HCM. It specifically emphasizes the identification, development, and retention of high-potential individuals within an organization. It aims to cultivate a pool of talented employees to fill critical roles and drive organizational success.

Here are the main differences between HCM and talent management based on 3 important parameters.

ParameterHuman Capital ManagementTalent Management
ScopeIncludes administrative aspect of managing people, payroll, workforce management, etcIncludes recruiting, onboarding, leadership development, and performance management.
PerspectiveA holistic view of people’s impact on the organizationFocuses on optimizing performance through talent positioning
FocusHCM covers a broader range of practices, including administrative tasks.Emphasizes individual development

The process of talent management includes various co-dependent functions. They are:

  • Resourcing Strategy: Developing a strategic plan to acquire and allocate the right talent resources for organizational needs.
  • Attraction and Retention Policies and Programs: Implementing strategies and initiatives to attract and retain top talent in the organization.
  • Talent Audit: Evaluating and assessing the existing talent pool to identify strengths, gaps, and development opportunities.
  • Role Design: Designing job roles and responsibilities that align with the organization’s goals and leverage employees’ skills and competencies.
  • Talent Relationship Management: Building and nurturing relationships with employees to foster engagement, satisfaction, and loyalty.
  • Performance Management: Establishing processes and systems to monitor, evaluate, and enhance employee performance and productivity.
  • Learning and Development: Providing training and development opportunities to enhance employee skills, knowledge, and capabilities.
  • Management Succession Planning: Identifying and developing future leaders within the organization to ensure continuity and smooth transitions.
  • Career Management: Supporting employees in their career growth by providing guidance, opportunities for advancement, and career planning resources.

talent managememt process infographic

(Source: Developing Human Capital © Andrew Mayo 2008)

Challenges of HCM

Managing Human Capital can be quite challenging for HR professionals. From attracting and retaining talent to optimizing performance, there are various hurdles to overcome. The 8 common challenges faced in human capital management are as follows.

  • Sourcing talent and onboarding them

Talent acquisition is one of the most common challenges of HCM. It can get tough to attract the right candidates and ensure a smooth onboarding experience for new hires. HCM systems solve this problem by automating the sourcing and screening process of candidates with customized parameters provided by the user.  

  • Planning a strategic workforce.

Strategic workforce planning requires focusing on several parameters like retention rate, employee turnover rate, time-to-hire, etc. This helps companies predict future challenges and identify opportunities. However, keeping track of all these metrics and generating solutions can get hectic. 

  • Using workforce analytics.

Workforce analytics is essential for understanding human resources, but it can be daunting for smaller businesses with limited resources. Analyzing complex data sets can be a challenge due to time and budget constraints.

  • Training and development of employees

Conducting timely training and development sessions for employees in an organization is a daunting task in human capital management. There are several steps involved in it like identifying skill gaps, keeping up on recent technologies, addressing individual needs, etc. To help cope with these, AI-based HCM software allows HR to automate these tasks and make the training process easier. 

  • Managing organizational change

Change management is an important aspect of organizational growth. Mismanaging change is a risk for HR and business leaders. Employees are often greatly impacted by decisions from top management. When implementing a new HCM platform, it’s crucial to prioritize preparing employees for the change and how it will affect their daily work.

  • Dealing with a multigenerational workforce

Managing a multi-generational workforce is tough because employees from different generations have different needs and perspectives. For example, millennials may want job security and a traditional work structure, while baby boomers might prioritize flexibility, work-life balance, and growth opportunities. 

To retain and engage everyone, organizations need tailored strategies. They should understand each generation’s unique needs and make sure all employees feel valued and supported. By doing so, they can strike the right balance and create a harmonious workplace.

  • Addressing skills gap

Employees’ overall performance and the organization’s development depend on improving employee skills. As technologies and tools are constantly evolving, it is important for organizations to effectively update their employees on their respective skills. Failure to do so may create a technology gap in the organization making them lose their competitive edge.

  • Promoting a high-performance environment

Fostering a high-performance culture is a challenge in HCM. Factors like performance management, job roles, and employee morale impact success. To excel, organizations need continuous improvement, adaptability, and motivated employees.

Common practices of HCM- A technological aid to organizations

Human capital management leverages technology to make HR functions easier. Choosing the right HCM technology can make HR tasks more efficient, saving time and money for the company. On average, for every dollar spent on HCM technology, companies see a return of $9.13. Additionally, companies can save around 90% on the costs of ongoing maintenance.

Here are some common practices that initially involved tons of manual work but are now made simpler with HCM technologies:

  • Obtaining, evaluating, and reporting data that directs HR functions.
  • Developing a business strategy backed with systematic information. 
  • Measurement-driven proof for successful HRM (human resource management) strategies.
  • Creating and instilling value in the organization through HRMS.
  • Relating business results with the impact on employees.
  • Assessing the actual value of human capital of an organization.
  • Enhancing the functionality of HR teams.
  • Providing factual data on human capital for finance and operations reports. 
  • Proving that HR strategies can be financially productive. 

Apart from these practices, HCM technologies also provide companies with cloud-based and data security services to further enhance HR systems. These technologies decrease the need for IT support for HR while maintaining protection for organizational data and information.

How to choose an HCM system?

To choose an HCM system, assess your organization’s needs, ensure scalability and integration capabilities, and prioritize user-friendliness, customization, and vendor support. Consider data security and compliance, reporting and analytics features, and evaluate the cost and return on investment.

Keka’s leading HCM tech solutions present you with features ranging from onboarding to offboarding an employee. 

Here are some of its human capital management solutions:

keka key features

Keka HR has made a significant impact in the HR tech industry since its establishment. With over 6500 customers worldwide and receiving multiple prestigious awards, it stands out as a leading HCM solution. It is best suited for SMEs (small and medium-sized enterprises.)

Keka HR is a highly regarded HCM solution that has gained recognition in the industry. Some of the product highlights that you should look for in HCM software are:

  • Seamless Integration: The software offers seamless integration, allowing HR professionals to efficiently manage various HR operations.
  • Comprehensive Functionalities: With a wide range of functionalities, Keka provides a holistic solution for HR management. It covers areas such as attendance, leave management, salary, and payslip generation.
  • Centralized Data Platform: Keka’s HCM and HRMS software utilizes a centralized platform, enabling easy sharing and retrieval of HR-related data.
  • User-Friendly Interface: The user-friendly interface of Keka HRMS enhances employee experience by providing quick access to important information.

Human Capital Measurement- Business Impact of HCM

Human capital measurement involves analyzing HR data using statistical techniques to identify connections, relationships, and causes. One of the most important functions HR is tasked with is to measure its strategies and showcase how it’s producing results for the company. In other words, the value created and fostered by HR needs to be measured with some metric. 

This measurement demonstrates the true business impact of human capital management or HCM. Such metrics or measurement techniques have been thus developed. 3 important approaches to human capital measurement are mentioned as follows

1. The Human Capital Index – Watson Wyatt

Watson Wyatt identified four main types of HR practices associated with increased value creation for shareholders.

  • Total rewards and accountability: 16.5%
  • Collegial, flexible workforce: 9%
  • Recruiting and retention excellence: 7.9%
  • Communication integrity: 7.1%

human capital scan

(Source: Mercer Human Capital Scan)

2. Organizational Performance Model – Mercer Hr Consulting

Mercer’s data-based consulting uses tools and analytics to connect human capital programs with business results. They help organizations understand their current and future needs, and develop talent solutions that drive business value. 

The Human Capital Scan developed by Mercer provides

  • Business objectives, challenges, and future workforce needs.
  • Overview of the organization’s human capital strategy.
  • Identifying any gaps between business design and human capital strategy.
  • Recommendations for diagnosing and improving alignment.

3. The Human Capital Monitor – Andrew Mayo 

Andrew Mayo developed a ‘human capital monitor’ that calculates the human asset worth of an enterprise as the product of employment cost and the individual asset multiplier. It can be mathematically represented as

Human Asset Worth = Employment Cost × Individual Asset Multiplier

The individual asset multiplier is determined by 

  • Weighing Capability
  • Growth Potential
  • Personal Performance
  • Alignment With Organizational Values 
ComponentFactor valueWeightingWeighted Value
Contribution1.70.350.595
Potential1.00.200.200
Capability1.53.00.450
Values Alignment1.51.50.225
Human Capital Index – 1.470

Here, the actual numerical value is not significant. What is important is that the process of measuring human capital helps identify whether it is adequate, growing, or declining. It brings attention to important issues that need to be addressed.

Frequently Asked Questions (FAQs)

1. How can human capital be built? 

Human capital is built through training, fostering continuous learning, offering mentorship, and promoting employee engagement and empowerment. It is created through a supportive and inclusive environment where employees are valued and cared about. It includes assessing and addressing the development needs of employees while providing feedback and recognition.

2. Differentiate between HCM and HRM 

HCM (Human Capital Management) focuses on strategically managing and optimizing the value and potential of employees, aligning human resources with business goals. HRM (Human Resource Management) is a broader term that encompasses administrative HR tasks such as payroll, recruitment, and benefits administration.

3. How does an HCM platform provider benefit a user organization?

An HCM platform provider offers a centralized system for managing HR processes, such as recruiting, onboarding, performance management, and talent development. It can streamline operations, improve data accuracy and enable data-driven decision-making. Furthermore, it increases the overall efficiency and productivity of a company by enhancing employee experiences and satisfaction.

 

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    Meet the author

    Keka Editorial Team

    A bunch of inspired, creative and ambitious youngsters- that’s Keka’s editorial team for you. We have a thirst to learn new subjects and curate diverse pieces for our readers. Our deep understanding and knowledge of Human Resources has enabled us to answer almost every question pertaining to this department. If not seen finding ways to simplify the HR world, they can be found striking conversations with anyone and everyone , petting dogs, obsessing over gadgets, or baking cakes.

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