Human capital management (HCM): Definition, the benefits, and how to approach strategic HCM

Human capital management (HCM) covers all the practices that HR teams use to shape employees into valuable assets, including both core tasks and strategic initiatives. HCM covers every step of the employee journey, from recruiting through to training, development, and succession planning. The goal of human capital management initiatives is to add value to the organisation by investing in the talent within.

As human capital management practices often revolve around strategy and wider business goals, you may also find it described as strategic HCM. 

Human capital management (HCM) and HR management (HRM) are closely linked, but are distinct. HRM concerns the core daily operations like employee management, payroll, and compliance. HCM is a wider term that can include operations but is primarily focused on developing employees so they become and stay valuable assets for the business.

A strategic approach to human capital management typically leads to improved productivity and business performance, but it also has a positive impact on employee experience, retention, and company culture. With the right practices in place, it’s also easier to monitor for compliance and consistency across the organisation.

The main benefits of investing in HCM include: 

• Streamlined HR operations: Create a strategy, map out your requirements, then build an HR system that works how you need it to.

• Improved productivity: Train team members, introduce workflows, and use technology to introduce efficiency and productivity benefits.

• More effective use of talent: Analyse employees’ skills and match them to roles that suit them best, or hire new team members based on actual requirements.

• Higher levels of performance: Provide employees with the training, support, and processes they need to work at their best.

• Increased employee satisfaction: Help employees feel valued and happier in their role with a combination of a people-first approach, the right training, and access to support.

• Reduced staff turnover: Treat employees as valuable resources and support their growth goals, so they’re less likely to leave for another job.

• Easier succession planning: Develop existing employees early and with clear goals in mind, so they’re ready to move into their next role with no downtime required.

• More effective compliance: Introduce systems and processes which make it easier to comply with essential HR legislation and requirements.

• Greater return on investment (ROI): Get more value from your workforce and the tools you need through more strategic, efficient use.

Strategic HCM introduces benefits within and beyond HR, so it should be a key focus for mid-sized businesses with ambitious growth plans. 

Strategic human capital management goes beyond basic HR operations and challenges HR teams to find ways to improve tasks and processes in a meaningful way — like making it more effective, efficient, or easier to complete.

Examples of strategic HCM in action include:

• Building personalised onboarding journeys

• Using technology to streamline the payroll process

• Making it easier for employees to request time off

• Giving employees the opportunity to work remotely

• Analysing data for trends and taking proactive action

• Introducing clear career development pathways

• Giving employees access to free training relevant to career goals

• Automating the performance review process so no review is ever missed

• Using HR compliance software for alerts and monitoring

Human capital management transforms everyday HR operations into opportunities to maximise the value of an organisation’s most valuable assets — its employees.

Small businesses can survive with spreadsheets and simple tools, but medium-to-large and enterprise organisations need HR software to keep operations running smoothly — especially if you have plans to grow across multiple locations or entities. 

Signs you need HCM software include:

• Too much time spent on admin: Instead of strategic work, your HR team’s time is taken up with tasks that could be automated — like updating records or processing time-off requests.

• Data silos: Your HR data is stored in spreadsheets, standalone tools, or in someone’s email history.

• Human errors: There’s an increase in errors and the time spent correcting them that could be better used elsewhere.

• Compliance concerns: With no single source of truth or processes in place, it’s harder to keep accurate records and stay compliant with UK HR legislation.

• No ability to scale: The systems you currently use are a roadblock to growth instead of an enabler, leaving you with no effective way to hire, develop talent, or onboard new hires at scale.

If any of these challenges sound familiar, it’s worth looking for HR software that can help. 

HCM software is any platform you can use for core HR and workforce management. HCM tools turn your strategic practices into a reality with workflows and processes which align with your wider goals.

There are three types of HR software commonly used for human capital management: 

• Human resources information systems (HRIS): Basic record-keeping and core HR.

• Human resources management systems (HRMS): Adds recruiting, payroll preparation, and performance management.

• Human capital management (HCM) software: Adds the ability to develop talent strategies, build succession plans, analyse workforce trends, and manage HR operations on a global scale. 

Small businesses typically use an HRIS, while medium-to-large businesses prefer an HRMS. Enterprise organisations need the extra functionality of a dedicated HCM platform, but they’re also a valuable investment for mid-sized businesses which plan to grow.

HCM software is built to handle HR processes right across the employee lifecycle, from talent acquisition to succession planning. The exact features you can access depends on your chosen software or plan, but common examples include: 

• Employee records management

• Recruitment and hiring

• Onboarding

• Time and attendance tracking

• Performance management

• Training and development

• Employee benefits

• Payroll

• Compensation management

• Workforce planning

• Offboarding

• Compliance

• Analytics and reporting

Human capital management software typically uses workflow automation and artificial intelligence (AI) across the system to deliver efficiencies and valuable insights in all areas, instead of just one.

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An intentional approach to human capital management requires strategy, communication, realistic goals, and the right tools. Use these best practices to increase your chances of success.

A HCM strategy is a master plan for how you’ll attract, retain, train, and develop your talent. Turning your ideas into a solid plan means you can align your actions with your goals, set key performance indicators (KPIs) and metrics to monitor, make the right resources available, and plan initiatives more effectively. 

Once you’ve got buy-in for strategic HCM, share your plans with the rest of the organisation. Invite employees to give feedback on specific HR projects, benefits, and processes, and tailor your plans based on the insights you receive. Keep communication positive, update employees as you hit milestones, and invest in a solid change management communications plan. 

Effective human capital management means you can swiftly move employees into roles as they open up, but that’s only possible if you’re aware of their current skill levels. Run an initial skills audit to understand strengths and where you have gaps, then introduce training as needed. Stay ready for future moves with regular audits — at least once a year, and every quarter for teams or industries where technology changes quickly.

A clear strategy is essential, and so is access to the tools which make executing that plan easier. Evaluate whether your existing HR system can support your changing HCM needs, and consider switching if it doesn’t. Look for HR software which includes performance management, workforce planning, and the ability to manage HR at scale — including across entities and locations if that’s in your growth plans. 

Strategic human capital management turns everyday HR into an opportunity for growth and development, as long as you have the plans, processes, and systems in place to make it happen. 

Support your shift into people-first HCM with Personio and benefit from: 

• Connected HR, with all your people data in one place

• Core HR, onboarding, and people analytics — plus the option to add recruiting, performance & development, compensation management, and more

• Analytics and trend-tracking across the organisation

• Workflow automation for repetitive HR tasks

• Preliminary payroll for more efficient and accurate pay data flow

• Purposeful AI for faster and more confident decision-making

Strategic HCM is another way to refer to human capital management. It’s the approach an organisation takes when they see the value in employees as assets, instead of an admin cost. Human capital management is strategic by default, but phrasing it this way can help reinforce the intentionality behind the approach.

Human capital management (HCM) is the broadest of the three main types of HR software, with features that fast-growing businesses and enterprises need — like workforce planning, compensation management, and multi-entity support. Human resources information systems (HRIS) are the most basic, and best suited to basic HR admin and record-keeping. Human resources management systems (HRMS) sit somewhere in the middle, with more advanced features designed for mid-sized organisations without complex needs.

Mid-sized companies typically do need HCM software, but it doesn’t always have to be in the form of an enterprise-level dedicated HCM platform. Evaluate your business goals, growth plans, and needs, then decide whether a feature-rich HRMS is the best choice or whether you need the global capabilities and complexity of an HCM platform.

Yes, HCM software can help with compliance. HCM tools often have built-in features, workflows, and settings which make it easier for organisations to comply with local and international regulations — like the ability to configure access controls, store documents for the correct retention periods, and evidence compliance with documentation and audit logs. Organisations remain responsible for their own compliance, but software can make it easier to follow the correct procedures and demonstrate that they’re working within the law.