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Updated Oct 24, 2023

What Is Human Capital Management?

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Sean Peek, Senior Analyst & Expert on Business Ownership

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To get the most out of their teams and retain top talent, managers and leaders need to invest in the proper practices and resources. One way to achieve this is through human capital management (HCM). A set of practices related to human resources (HR) management, human capital management refers to each part of recruiting, hiring, maintaining and optimizing talent at an organization. It is essential to understand what HCM is, how to implement it in your own business, and the benefits of adopting HCM software.

What is human capital management (HCM)?

HCM is a company’s process of hiring the right employees and optimizing productivity to manage their workforce effectively. What was once seen as a basic administrative process for an organization is now an essential part of a business’s value. These are some important strategies of HCM:

How does HCM differ from HR?

While the terms “HCM” and “HR” are often used interchangeably, they have different meanings.

  • Human resources focuses on traditional core employee management functions for an entire organization. These include hiring, job and position management, and administrative upkeep. HR creates and manages the way a company acquires and trains talent.
  • Human capital management can encompass the above processes while aiding in talent and workforce management. HCM systems tend to maximize the value and ROI of each employee.
Bottom LineBottom line

HCM is more focused on getting the most out of an individual than standard administrative processes.

What are the administrative elements of HCM?

Human capital management includes many moving pieces that cross over into different areas within an organization. Broken down by life cycle, here are the elements of each:

Recruiting potential talent

HCM makes the hiring process easier for organizations by increasing the speed at which it recruits prospective candidates, and the quality of its prospective hires. For example, it can increase engagement with work-life balance solutions that motivate candidates and show them the organization looks out for its employees. Companies entice candidates not just by sharing its list of benefits and work-life balance, but by informing them of how the company invests in employee professional development.

FYIDid you know

These considerations can make a company stand out to top-tier talent and signal to prospective employees that they will be valued at this organization.

Engaging current talent

HCM practices also offer current employees administrative support. This can include workflow, benefits, payroll, IT and other types of management. Unlike standard HR practices, a company’s HCM is unique to the organization and the employees that work there. HCM also streamlines these operations to make them more efficient. Additionally, it uses analytics to inform data-driven decisions about the work culture and employee behavior.

Optimizing and developing talent

Once someone new is in the building, they shouldn’t be forgotten about. Managers typically meet with their employees regularly to discuss their career development goals and how they’d like to progress within the company. From these conversations, managers work with the employee to create realistic goals and career paths. HCMs can help that happen by offering training and educational resources to further staff development. HCMs also start the discussion about total compensation and rewards, so the burden isn’t placed solely on the employee.

“Regarding investing in an employee’s personal development, mentor programs, executive coaches and leadership development programs all are part of the value proposition of working for your organization,” said Stephen Kohler, CEO of Audira Labs. “Any company concerned about retaining their most talented employees must figure out how to navigate this reality if they want to continue to retain and attract top talent.”

What is HCM software?

To implement talent management and optimization systems within a company, organizations can use HCM software. HCM software differs from human resources management systems (HRMS) and human resources information systems (HRIS), as it caters to workplace efficiency and development over collecting demographic information. While HCMs, HRMSs, and HRISs differ, the systems can support a similar range of functions, like payroll, employee self-service, and benefits administration, depending on the vendor.

HCM software can customize and automate the functions in which your organization needs to maximize employee efficiency. The application can record, organize and store employee data to help you make data-driven decisions about each employee’s productivity. Software managers can add and monitor specific goals and record the employee’s benchmarks to show their progress. Other functions include talent management, applicant tracking, onboarding, internal training and attendance monitoring.

Did You Know?Did you know

Not all HCM software will work on every piece of hardware, and it may not integrate with other systems, like top accounting software.

What are the benefits of HCM software?

Make data-driven decisions.

HCM software allows companies to take the employee data they have gathered and use the analytics to make well-researched business decisions. This could save money in the long run, as companies are not throwing money at unproven ideas.

Increase employee satisfaction.

Employees will be more productive and happier if business decisions are being made based on their development. With software that supports development goals and encourages professional development, employees will feel the company values them and is invested in their work.

Improve retention rates.

Employees stick around longer when they feel as though they have a stake in the company. Having HCM software track development and provide education for employees promotes staff retention, therefore cutting down the cost and time involved in hiring new employees.

Improve company culture.

As the saying goes, a rising tide lifts all ships. So, when all employees feel valued, the company culture becomes better. Employees will be more engaged with the company, increasing their efficiency and ability to collaborate. Internal companywide communication may improve as a result of both positive mindsets and better processes.

Implement all-in-one scheduling and payroll.

Managers no longer have to focus their time on scheduling and running payroll. Within HCM software, they can automate tedious, time-consuming manual tasks.

What are the potential drawbacks of HCM software?

While integrating an HCM software can make your employees more productive and efficient, there are potential drawbacks to consider.


The cost of HCM software can vary, reaching as high as $300 per employee. For smaller companies, the price ranges from $40 to $100. You should make sure you have the funds within your budget to afford these systems for the long term.

Risk of a data breach

As with any computer system or application that collects employee data, there is a risk that hackers can access the information. While a security breach could be consequential, there are stringent security measures your company can take to keep your HCM data safe.

ROI for cost and time

HCM technology adoption could have a long ramp-up before launch. And with the large per-employee price point, you may be paying high costs before getting your return on investment. Discuss with your IT and internal team how long the software will take to implement, what the financial burden of a long launch would be, and how the problems the HCM software solves outweighs both.

TipBottom line

It’s important to find software that can help you achieve specific goals while fitting into your existing budget.

What to look for in HCM software

Picking the best HCM software for an organization comes down to a team’s needs. Make a checklist of requirements so you know what you specifically want in an HCM system. There are several factors you should evaluate when researching which HCM software is best for your business:

  • Price
  • Compatibility
  • Increased productivity
  • Adaptability for all users
  • Talent strategy support
  • Actionable data insights
  • Technological ecosystem connectivity
  • Compliance support
Did You Know?Did you know

There are a number of robust HR software options to choose from. You can learn more about some of the best options in our review of Paychex, our Gusto review and our review of Rippling.

When deciding on which HCM software to use, you should also consider the following questions:

Will this software grow with the company?

Most companies are not building their internal systems from scratch, so they’ll have to integrate their HCM software with their existing system. Pay attention to the technology requirements of the software you are looking into.

Can it be customized to fit our unique needs?

Every business is different, so some HCM software becomes a better fit than others. Most of the time, the best HCM software can be customized and fits specific industries and businesses.

Does it align with our budget and goals?

With different budgets and goals, a complex HCM system may not be the best bet – financially or in practice – for every business. Some smaller companies may find they cannot afford more robust agency software packages, but they also may not need all of the features included in that package.

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Sean Peek, Senior Analyst & Expert on Business Ownership
Sean Peek has written more than 100 B2B-focused articles on various subjects including business technology, marketing and business finance. In addition to researching trends, reviewing products and writing articles that help small business owners, Sean runs a content marketing agency that creates high-quality editorial content for both B2B and B2C businesses.
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