The five M’s — man, materials, machinery, minutes and money — are the foundation for growth and profitability in business management.

Among these, man stands out as the driving force, responsible for mobilizing, allocating, and optimizing other resources. After all, there’s no fully viable replacement for the human element just yet!

People are responsible for mobilizing, allocating and utilizing all other resources to their optimal potential. That’s where human capital management (HCM), a concept similar to human resource management, comes into play.

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Article Roadmap

• What Is HCM?
• Business Challenges It Addresses
• Core Components
• Phases of Implementation
• HCM vs. HRM
• What Is an HCM System?
• Next Steps

What Is HCM?

Human capital management (HCM) is the strategic management of employees to ensure enhanced productivity and gain a competitive advantage. Apart from basic activities like recruiting, managing and retaining employees, it obtains, analyzes and reports about employee data to help you better manage your business’s employees.

HCM includes administrative processes like workforce planning, compensation planning, recruitment, onboarding, payroll, performance management, reporting and analytics, employee self-service, compliance services, learning management, workflow management and retirement services.

The main goal of human capital management is to maximize the ROI derived from employees and retain high-performers in the organization, often using a cutting-edge digital software toolkit to help automate HR operations, develop and execute on overall HCM strategy and develop your business’s strategic goals.

HCM also looks at strategic employee engagement and retention investments through performance management, incentives and training programs. Doing so enables a holistic and strategic approach to managing employees to achieve organizational goals.

Apart from helping achieve organizational goals, why is HCM so crucial for companies to get right?

• Improves employee engagement and retention rates
• Enhances organizational performance and productivity
• Provides valuable workforce data and analytics insights
• Helps manage HR-related legal and compliance issues
• Supports workplace diversity, equity and inclusion efforts
• Attracts and retains top talent by creating a positive work environment and culture
• Drives higher employee satisfaction and morale
• Supports talent development and succession planning
• Helps organizations respond quickly to market changes and business environment challenges
• Increases HR processes efficiency and reduces administrative burden

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Business Challenges Addressed

HCM addresses several critical business challenges by providing strategic solutions for workforce management. Here are some business challenges HCM addresses:

• The need to attract, retain and develop top talent. It provides tools and processes for recruiting, onboarding, training and developing employees to ensure they have the required skills and capabilities to meet business objectives.
• Compliance with employment laws and regulations. It ensures your HR policies and practices align with legal requirements, avoiding costly lawsuits and penalties.
• Creating a positive work environment that promotes employee engagement and retention. It offers processes for measuring employee satisfaction and engagement levels, identifying areas of improvement and implementing strategies to boost employee morale.
• Managing employee performance by setting clear expectations, providing regular feedback and identifying improvement opportunities. It provides tools to track and analyze employee performance data, enabling managers to make informed decisions about promotions, bonuses and other rewards.
• Planning and managing the workforce to meet business needs. It provides tools to forecast workforce needs, identify skill gaps and develop strategies to fill them.
• Agility to respond to changes and challenges in the market or business environment using workforce insights.

At its core, HCM helps you better manage your human capital, align your workforce with the strategic goals and create a positive work environment.

By addressing these business challenges, HCM helps your organization achieve its objectives and remain competitive.

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Core Components

Human capital management incorporates various procedures to strategize recruitment, onboarding, training and performance management. The core components of HCM include:

HR Administration

HR administration is the foundational component of HCM. It covers the foundational management, storage and security of employee data, personal information, compensation, benefits and employment history.

Recruitment and Onboarding

Onboarding encompasses welcoming, orienting and retaining new employees to the organization. This component mainly involves identifying and selecting candidates for job openings. Other aspects include identifying and selecting candidates, job postings, resume screening, interviewing and hiring.

Performance Management

Performance management includes the processes involved in setting performance goals and expectations, providing regular feedback and conducting regular performance evaluations. Effective performance management involves setting performance goals, providing feedback and conducting evaluations to improve engagement and productivity.

Learning and Development

Learning and development provide employees with the most suitable professional growth and development opportunities. Some examples include training, coaching and mentoring. Investing in employee development improves employee engagement and retention and builds a skilled workforce.

Succession Planning

Succession planning identifies and develops employees for key positions to establish a reliable talent pipeline, ensuring your organization has the right personnel to support its long-term goals and objectives.

Compensation and Benefits

Compensation and benefits features help design and manage compensation and benefits programs, including pay structures, bonuses, incentives and benefits offerings, helping retain and recruit top talents.

Workforce Analytics

As a component of HCM, workforce analytics utilizes data and analytics to provide insights into the workforce, covering employee training efficiency, demographics, performance and engagement.

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Phases of Implementation

As for all aspects of business management, implementing HCM intelligently and systematically is crucial for success. The phases for successful implementation of HCM include:

• Evaluation: Skills and talent are constant needs in any growing business. That’s why the first phase of evaluating skills and organizational talents is so vital. Analyze skills and document your evaluation with attention to detail. Why? To ensure zero errors and omissions that could lead to far-reaching, negative impacts.
• Consolidation: With the right data sets and information from the previous phase in hand, consolidation enables overseeing employees and job allocation based on evaluation, ensuring optimal efficiency and productivity. At its core, it ensures employees with the right skill sets are assigned the right jobs. This phase also highlights whether staffing changes are needed.
• Communication: Communication of any form, be it face-to-face or virtual, is necessary for smooth business operations. Ensuring strong communication prepares employees for upcoming operational changes. This phase ensures transparency between management and employees, leading to better delivery of expectations. In this phase, the workforce can also make suggestions for improvements.
• Implementation: This stage of the HCM process uses all the valuable insights gathered through the previous steps. Now, companies gather insights to relocate job roles for optimal performance or make necessary changes based on acquired data.

Implementation Tips

Human capital management is foundational to your business’s growth. Given its importance, you’ll need to leverage it optimally. Here are some tips to improve HCM implementation in your organization:

• Before implementing HCM, define clear goals and objectives that align with your organization’s priorities. That way, you know your implementation addresses your key business challenges and delivers measurable results.
• A thorough understanding of your company culture and the key requirements helps fill vacant positions. This understanding is especially necessary given that talent acquisition is an investment, which is vitally important for maximizing ROI.
• Assess motivation and analyze candidate skills carefully to ensure employees fit their roles for optimal efficiency and minimal disruption.
• Don’t underestimate the importance of teamwork. Recognize the need to place workers in the right environment with the right teams and managers for optimal results.

HCM vs. HRM

People often use the terms HCM and HRM interchangeably, but it’s not entirely accurate to do so.

Human capital management and human resource management both have the same goal of managing people in the workplace. While HCM and HRM are often used interchangeably, they differ in depth and approach. HRM focuses on traditional employee management, whereas HCM relies on analytics for improved decisions benefiting both the organization and employee well-being.

The two slightly vary in purpose, too. Human resource management ensures a positive work environment and job satisfaction for employees and managers. Human capital management ensures that everyone can use their talents and skills optimally.

Suppose you’re wondering how this impacts HR software. In that case, you can also go through our comparative analysis between similar HR terms to better understand the best solution for managing HCM or HRM.

What Is a Human Capital Management System?

With technological advances happening in leaps and bounds, the HCM field hasn’t been untouched. The market offers various HCM software that helps businesses be more efficient and makes employees’ lives more convenient.

These tools enhance business efficiency and employee convenience, offering core HR capabilities, talent management, succession planning, analytics and business intelligence. The core purpose of these tools is to bring employees to the forefront of your organization.

Some well-known HCM solutions include UKG Pro (formerly branded as UltiPro), Oracle HCM Cloud, Dayforce, SuccessFactors and others. Refer to our software guide for a more in-depth analysis.

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Next Steps

HCM is the linchpin of the mutual relationship between employees and organizations. It provides essential data to mobilize the workforce for better productivity and highlights performance indicators for career development.

By combining human capital management’s traditional, people-centric approach and techniques with today’s modern, data-driven analytical insights, HCM establishes a foundation of success and helps promote dynamic, collaborative workforce development.

HCM software can play a pivotal role in that success, but only if you have the right product for the job. Get a head start with our free comparison report to easily compare leading products across features, user reviews and more.

How have you leveraged HCM to optimize your employee’s performance? Let us know in the comments!