Editorial

16 Aug 2021

Why Human Capital Management Is Important For Your Business

Mary Isaeva

You’ve probably heard someone in a leadership position say, “Our employees are our greatest and critical asset,” at one time or another.

While most of us would agree, what does it actually mean when we refer to business people as ‘assets’? Does this mean they have economic value like buildings, inventory, or equipment?

Renovations to a building will generally increase the building’s value, and inventory that sits on a shelf for months will generally decrease in value. But how do you impact the value of an intangible asset like an employee?

The practice of human capital management, or ‘HCM’ for short, has become increasingly prevalent in the last few decades for a couple of reasons.

One is that people recognize that an organization’s accurate workforce insights are its greatest assets.

The second, however, is that for many companies, the cost of their workforce is often their greatest expense.

As a result, HCM has become the driving force behind many new business practices, a growing abundance of human capital management software solutions, and an emphasis on the concept of human capital as a competitive advantage.

This article highlights the essentials of human capital management and why it matters for your business strategy – so, dive in!

Does Human Capital Management Only Focus On Employees?

The steps that make up human capital management

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 key functions, HCM goes beyond the primarily administrative and traditional HR functionality.

It addresses more strategic and data-driven decisions and disciplines like real-time employee engagement, decision-making, talent review acquisition, retention, absence management, and employee life cycle.

According to Gartner, for example, HCM is a set of practices relating to people resource management and talent infrastructure.

But HCM isn't only about 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 modern workforce.

Is Human Capital Management The Same As Human Resource Management?

https://www.youtube.com/watch?v=qmUNwCbCuAo

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 function, duties, or daily 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 resources 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?

What defines human capital management

Essentially, human capital focuses on the value or impact an employee receives from human resources. In other words, how a business's human resources impacts the company's bottom line.

Any definition of human capital should cover the skills, experience, qualifications, and comprehensive insights 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 impact on a business. For example, it is pretty clear to see how a salesperson can have a direct impact, but what about a secretary?

What Elements Are Included In Human Capital?

https://www.youtube.com/watch?v=c5iigcEppZw

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 its inherent value. 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 processes in line with your business goals.

What Goals Should You Have In Place For HCM?

To achieve optimal human capital practices, these are some questions you should start asking yourself:

  • Which activities create value? Do any work against it?
  • Which factors add value, and where are the risks?

To answer these questions, do not just analyze your employees. Consider teams, departments, and the entire workforce to achieve an all-encompassing response and analysis.

What Are Human Capital Initiatives?

https://www.youtube.com/watch?v=-DFZ3g97bj0

In his book, “Human Capital Management: Leveraging Your Workforce for a Competitive Advantage,”author, Mark Salsbury, writes, “human capital initiatives (HCIs) are large-scale career goals or objectives an organization chooses to pursue that are heavily dependent and reliant on the people of the organization.”

Salsbury also points out that HCIs are strategic, not tactical, and goes on to provide several examples, as follows:

  • Improve performance environments
  • Lean management
  • Accurate payroll
  • Integration of a merger
  • Build a global mindset
  • Global talent review and management
  • New business model (often including reorganizations)
  • Re-engineer a functional discipline (sales, marketing, etc.).

While this is a very useful list, many of these are large initiatives that require significant time and resources, and that are applicable only to larger, well-established organizations.

Certainly, most startups and early-stage companies aren’t concerning themselves with global or international human capital initiatives.

For founders, CEOs, and business leaders within these organizations, it’s important to note that HCIs are relative to the size of the business.

Looking back at Salsbury’s definition, he talks about “large-scale goals or objectives.” Depending on what your business looks like, ‘large-scale’ might be an initiative that affects all the employees in your organization.

The following are some examples of HCIs that you might find in a smaller organization:

  • Create and deploy organizational vision and values – As with business growth and development practices, developing an HCM system starts with defining and understanding your company’s purpose and core beliefs. These directly impact workplace morale, how people behave, and the overall importance of the human capital in your organization
  • Create a new employee orientation and onboarding process – To ensure that your human capital is working for you and your industry-specific customer needs, it’s important to constantly be on the lookout for top talent infrastructure that matches your mission
  • Raise investment funds to hire new software developers – The more efficient your software is when it comes to managing your teams, the better your work, profitability, and overall workforce productivity will be
  • Create new business key functions (e.g., core HR functions) and hire the first-team employee in line with your strategic goals and objectives – Whether they’re quarterly or annual goals, or five-year BHAGs (‘Big Hairy Audacious Goals’), your human capital initiatives will often be driven by your organization’s specific, measurable, and time-bound objectives. For example, a goal to increase your annual employee engagement scores by ‘X%’ will drive specific HCIs that are managed within your human capital management system. This will, in turn, drive a specific set of practices to achieve those goals
  • Develop or purchase an employee data management system – Successful HCM requires human capital data for decision-making to manage, take action on, and measure the results of human capital initiatives. There are many types of employee-related data that can be captured, stored, and made available in detailed analytics, such as employee demographics, compensation and benefits, payroll performance, time and attendance, performance management, and skills training and development. This data can be managed using anything from an Excel spreadsheet to an enterprise-level HCM software solution
  • Establish regular communication practices between employees and managers. Like any system, HCM needs to be managed by people. Because of the far-reaching impact of human capital initiatives, the HCM team will typically be cross-functional, with leaders from across the organization. In organizations with a dedicated human resources function, the most senior leader in the HR department (e.g., Chief Human Resource Officer or VP of HR) will often drive HCM initiatives. In smaller organizations, this responsibility would fall to a senior executive (such as the CEO or COO). They will ensure that communication lines remain two-way.

As you can see, all of these HCIs require the people in the organization to make workforce productivity happen.

It will ultimately contribute in some way to the acquisition, management, and development of the organization’s human capital.

Why Do You Need A Human Capital Management System?

Why human capital management is important for Your Business Blog Image 3

When done right, HCM benefits administration as it 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 increase the footprint of each employee to help boost the payroll performance of your business.

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, and it prepares your company for success
  • 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.

How To Measure Your Human Capital Management System’s Success

https://www.youtube.com/watch?v=_TWmYV9-BBs

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 are 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 value and period while improving your quality of service, product, and processes.

Four Steps To Successful Human Capital Management

Human capital management implications

You cannot allow your human capital strategies and 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 them.

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 broad idea of the range of skills or talent available to you. This can be achieved by implementing efficient talent review 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 and 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 deep 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 for success, 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 participation.

What Is HCM Software?

https://www.youtube.com/watch?v=p9NUAPk3PPg

An essential 'ingredient' to any HCM system has to have the right human capital strategies and management software.

HCM technology or software can help to accelerate HR processes with employee self-service, bringing the processes you have in store to life, streamlining HR operations, and ensuring 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 and core business asset of their organization – their employee.

The software is designed to ease maintenance and any business process while boosting employee experience.

An HCM software can work across different human resources departments, automating workflows to replace manual tasks and HR processes and helping 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.

To Sum It Up

Human capital management meeting

How are you focusing on and prioritizing the development of the people in your organization?

What people, management processes, and practices do you already have in place that will help get you on your way to building a human capital management system? Which ones are you missing and working on next?

Does your organization have a vision (purpose) and set of objectives that guide your approach to your people – your human capital?

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 a tool 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 in the long run and give it the streamlining it needs while bringing out the best from your team.

background image

Ready for the next step?

Sign up for a quick 30 minutes demo and see what flair can do to automate your HR department and help you focus 100% on growing your employees the right way.

Book a Demo
Free Demo