What is Human Capital Management?

What is Human Capital Management?

Human capital management (HCM), though not a particularly inviting phrase, is an essential strategic function for every business with employees. It’s the fuel to your fire, and without an intentional approach, your whole organization could burn out. So what falls under the purview of human capital management, and how is it different from human resource management?

HCM principles permeate throughout your business whether you have a dedicated approach or not. Human capital management is the process of maximizing the return on investment of the people you hire. Many functions fall under this umbrella, and although referring to your employees as capital can feel somewhat alienating, it’s an essential framework for making informed people decisions.

When you think about your team as an investment with the potential to grow, you’ll do everything you can to improve their performance. In this blog, we’ll explain more about HCM, why it’s important, and how to improve it for your business.


Human capital management team posing for a picture.


Why is HCM important?

Consider that employees are, after all, one of the highest costs of running a business. Generally, each employee costs about 1.25 – 1.4x their salary after accounting for basic benefits and taxes. Of course, that cost can vary depending on the benefits and resources you provide for your team. Since you’re investing so much in your employees, to begin with, you want them to grow and succeed. Human capital management practices are the best tools in your kit to make that happen.

HCM is the process of hiring, training, managing, and retaining your employees. According to McKinsey, there’s no significant difference in HCM capabilities between small and large companies, but rather, success depends on organizational health above all else.

Additionally, employee engagement efforts typically come from your HCM team. According to Gallup, employee engagement is in the tank around the world, with 85% of workers feeling disengaged. Low engagement leads to lower productivity, more turnover, absenteeism, and even more workplace safety issues.

Building a culture of inclusivity, transparency, and opportunity can help you get the most out of your people, no matter the budget you’re working with. With a consistent strategic approach to HCM, you’ll fill your ranks with top talent who want to stay with you for a long time.


How is HCM different from HRM?

Human capital management and human resource management overlap in certain ways, but there are some distinct differences worth covering. HRM refers to the process of establishing your company’s employee management practices based on your company policies. For example, employment contracts, employee reports, payroll administration, and HR compliance functions fall under HRM.

HRM is like building a perfectly well-functioning, reliable car, and HCM is like turning it into a lean, mean racing machine. HRM ensures you have the basic necessities taken care of to run your business safely. HCM, on the other hand, is an enhancement of some of those basics. It allows your business to recruit, onboard, develop, and retain employees more effectively. Instead of losing top performers to fancier opportunities, great HCM makes you the fancier opportunity.


Office With People Reviewing Data On Monitors


How do I improve HCM for my business?

Hopefully, after reading this blog, fine-tuning your human capital management strategy will leap your list of priorities. Luckily, we have some ideas to improve HCM for your business.

First, remember that your employee experience should delight well past hiring and onboarding. Those processes need to be professional and structured, of course. However, you must continue investing in your employees beyond that initial training window. For example, keep the team-building events coming even after everyone is acquainted.

Also, provide learning and development opportunities. If you want to maximize your investment in employees, be intentional about their growth. These opportunities should be available to everyone, not just top performers.

Next, be strategic, and treat HRM like any other function in your business. That means setting KPIs and OKRs and measuring performance on those initiatives. For example, if you’re launching an L&D program, measure the adoption of the resources and the impact of the new learnings. Employee surveys play a prominent role in measuring HCM success as well.

Transparency is also crucial. Communicate regularly with employees, especially about things that will affect them if you can talk about it. Transparency builds trust; without that, your team won’t be around long.

Additionally, try to connect with your employees in authentic ways. For larger companies, that’s a little more complicated, but really, everyone just wants to know that they’re valued. If you have too many employees for regular executive contact, make sure managers schedule regular one-on-ones and provide genuine feedback often.

Finally, you can invest in an HR outsourcing solution like ADDA. This can work in a couple of ways depending on your specific needs. For example, you may want to keep the strategic aspects of HCM in-house, so you outsource administrative functions. The reverse works well, too, if you want strategic expertise. An HRO can take everything off your plate if you’d like, and it’s generally much cheaper than an internal team.


ADDA can be your HCM solution

Strategic human capital management can dramatically improve your organizational performance. With their HCM expertise, ADDA’s consultants can be the productivity power-up your business needs. Contact us today to get started on a custom HCM consulting solution for your business.

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