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Why Human Capital Management is Important for Your Business

16 Aug 2021

Employees smiling and sitting together while looking at a laptop.

Why Human Capital Management Matters For Your Business

You've probably heard it said several times that employees are a company's greatest assets, and that is no exaggeration. In simple terms, a company's human capital attracts and makes it a steady flow of financial capital. The practice of human capital management (HCM) has grown significantly over the past couple of decades, and for good reasons. 

One reason is that it recognizes and appreciates that the workforce is always an organization's most valuable asset. Another reason is that one of the most significant expenses for many organizations tends to be the cost of the workforce. As a result, companies now resort to HCM as the main driving force behind their practices.

This article highlights the essentials of human capital management and why it matters for your business strategy. 

Does HCM Only Focus About Employees?

First of all, it is essential to understand what HCM is and the scope of its focus. HCM comprises a comprehensive set of tools and practices employed in recruiting, managing, and developing employees - full-time and contingent. As mentioned earlier, HCM practices highlight that employees are huge organizational assets and require the needed investment for better management and maximization of their business value. 

Unlike what you'll find with typical HR functions, HCM goes beyond the primarily administrative and traditional HR functionality. It addresses more strategic disciplines like real-time employee engagement, decision-making, talent acquisition, retention, absence management, and employee life cycle. According to Gartner, for example, HCM is a set of practices relating to people resource management.

But HCM isn't only about the physical employees, as it also covers the category of software organizations use in sourcing, recruiting, managing, and developing their workforces. Beyond the employee, HCM also focuses on the structures of different teams, groups, or entire departments. Instead of just the individual employee, it is concerned with the whole process. At the same time, it still highlights the abilities and skills of the individuals that form the workforce. 

Is Human Capital Management the Same as Human Resource Management?

It is not uncommon to hear people often use the term human resource management (HRM) during any discussion regarding HCM. While you will find many similarities between HRM and HCM, the two are not necessarily the same. 

HRM focuses more on the core administrative duties or tasks that make it easy for people, workers, or employees to do their daily business. For example, HRM covers tasks like storing employee data, tracking their work time, etc. 

HCM, on the other hand, focuses on every other thing that helps maximize the value of the employees. 

Think of it this way; HCM is the design of the human resource building, resting on the foundation of HRM. HRM helps keep the entire structure together, but HCM allows that structure to shine or make it even more appealing. You may not see the efforts of the HRM from afar, but you will see the impact of a good HCM.

How Do You Define Human Capital?

Essentially, human capital focuses on the economic value or impact an employee receives from the human resources. In other words, how a business's human resource impacts or affects the company's bottom line. Any definition of human capital should cover the skills, experience, qualifications, and knowledge possessed by an individual or group of individuals viewed in terms of their general value to a given organization.

When it comes to the value of an employee and how it affects a business's bottom line, the main idea here is to quantify and develop each impact over some time. The reason is that not every employee will have a direct economic impact on a business. For example, it is pretty clear to see how directly a salesperson can have a direct economic impact, but what about a secretary?

What elements are included in human capital?

The definition of human capital makes it look like employees are nothing more than assets for an organization or business, but that's not the case. Instead, it looks at human capital in terms of the inherent value, which contains certain elements. These include:

  • The skills of the employee, which provides for things like academic qualification, certifications, etc
  • The employee's history of working experience and how this experience has shaped their way of thinking
  • Everyday capital, which includes the daily habits or behaviors of an employee
  • Social capital comprises the employees' social skills and how they interact with other workers and employers. 
  • Brand: This includes the influences, power, leverage, etc., that an employee has and their ability to use them.

Although each element is essential, it is best to take all of them as human capital. Moreover, no two individuals or workers are the same, as each person has a unique dimension to their personality. And this extends to how much impact a person can have on business processes.

Why Do You Need a Human Capital Management System?

When done right, HCM benefits administration can guide you as a business owner or employer to appreciate, develop, and optimize the workforce. While you should be able to see a general result on your entire crew, the main focus is to maximize the impact of each employee to help increase the performance of your business.

In that sense, getting your human capital management system right is a way of giving your business a massive competitive advantage. To break this down even further, here are some reasons why you need an HCM system as a business owner or employer:

  • It helps produce better employee performance, which will lead to 
  • An increased level of satisfaction 
  • It has a positive effect on the general culture of your company
  • It helps reduce staff turnover and the rate at which people leave (churn rate)
  • It also increases the returns you get from an employee referral program and succession planning

That said, every employer should aim at helping their employees become better at their work, and this is where a Human Capital Management System comes in. 

How Do You Develop Human Capital?

Another way to think about HCM is a system that creates the enabling environment for your employees to succeed at what they do. But how do you develop human capital? Here are some steps you can follow.

  • The first step is to employ only qualified workers.
  • The second step is about effective management. That includes motivating your workers, assisting them in performing, and giving them feedback.
  • Next, you provide the necessary training and development course to build their capacities.
  • The final step is to measure the impact or success of your HCM system (which comes next)

How to measure your Human Capital Management System success

Your ability to measure how successful your human capital management system is is crucial. You need to focus on the tangible value of your employee in addition to the extra value created by your human resources. You can use the following prerequisites to help you achieve this.

  • Clear corporate goals, which your employees should help you meet.
  • Key performance indicators, metrics, empirical data, and qualitative and quantitative assessments define performance management goals.
  • A complete corporate culture that includes core principles focused on value addition
  • Clear organizational goals communicated to the entire workforce

Additionally, for any human capital management system to be truly successful, it needs to come with the ability to put needed procedures in place and carry out specific activities. That means you need to collect data, analyze it, and develop the necessary implementation activities based on the results of your findings. 

As mentioned earlier, one of the essential goals of having a human capital management system in place is to give your establishment or business a significant competitive advantage and strengthen corporate performance. To achieve this, you need to put measures in place to reduce costs over a long-term period while improving your quality of service, product, and processes.

Four Steps To Successful Human Capital Management

You cannot allow your human capital management system to take care of itself. From the moment you put your systems in place, you need to take the utmost care to ensure that it meets the target you set for it. The best way to achieve this and ensure success is to implement your system in four unique phases in the following order;

The Evaluation Phase

The first phase should be for evaluation. Here, you need to document and analyze every available talent or skill you can tap from your workforce. You need to take the time to do this as comprehensively as possible so that you don't end up missing vital details that can cause you to miss an opportunity to improve.

The Consolidation Phase

The second step is your consolidation phase. After the first phase, you should have a comprehensive idea of the range of skills or talent available to you- this can be achieved by implementing efficient talent management skills. The consolidation phase should make it possible for you to work with what is at your disposal. But that's not all, as you also want to ensure that every individual talent or skill set available is used in the right way to help the organization or business. In some cases, you might even have to embark on some important professional development, capacity building, and staff changes. 

The Communication Phase

Up next is the communication stage. You need to ensure that you keep your employee informed by communicating your planned initiatives to them. The best way to do this is by having an in-house meeting and speaking with them in person instead of opting for other means of communication. By doing this, you can promote and ensure transparency concerning any workforce planning, labor scheduling or budgeting plans you may have for the future of your organization as well as your workforce. 

The communication phase will also help ensure that you don't take your workforce by surprise or shock them when you implement any sudden changes. This is also important when conducting performance reviews. That is why it is essential to be clear right from the get-go.

The Implementation Phase

Your final step is the implementation phase. With the previous three phases already mentioned, you should be able to gather almost every insight you need. That should make it possible to assign some of your workers to new sectors or give them new responsibilities, giving them the chance and motivation to make use of their talents. However, it would be best to ensure that you maintain the highest standards possible by carrying on with all the needed professional development, giving and receiving important feedback, and always keeping an eye on the state of affairs. 

It is also worth knowing that anytime you make significant changes in your company, you also need to manage the professional changes that may come with it. The reason is that, for any implementation to be successful, you need to have all your employees on the same page and promote onboarding.  

What Is HCM Software?

An essential 'ingredient' to any HCM system has to have the right human capital management software. HCM technology or software (sometimes called HRMS or HRIS) can help to accelerate HR processes with employee self-service, bring the processes you have in store to life, streamline HR operations, and ensure that they work long-term. 

This software is a technology application that can help a small business owner or employer look after and manage the most important asset of their organization - their employee. The software is designed to ease maintenance and any workforce management process while boosting employee experience. 

An HCM software can work across different human resource departments, automate workflows to replace manual HR processes, and help senior executives, HR professionals, or HR leaders manage the organization. It can also help you integrate HR processes with ERP, CRM, and other business processes.

In conclusion, human capital management matters for almost any business, especially considering how complex the subject can be. Suppose you are a business owner or employer. In that case, the last thing you want to do is underestimate how valuable an asset like this can be for your organization or business goals. 

You can take advantage of HCM software to handle the management portion of human resources long-term and give it the automation it needs while bringing out the best from your workforce.

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