What Is Human Capital?

The term human capital refers to the economic value of a worker's experience and skills. Human capital
includes assets like education, training, intelligence, skills, health, and other things employers value such as
loyalty and punctuality. As such, it is an intangible asset or quality that isn't (and can't be) listed on a
company's balance sheet.

Human capital is perceived to increase productivity and thus profitability. The more investment a company
makes in its employees, the chances of its productivity and success become higher.

Human capital is an intangible asset not listed on a company's balance sheet.

Human capital is said to include qualities like an employee's experience and skills.
Since all labor is not considered equal, employers can improve human capital by investing in the training,
education, and benefits of their employees.

Human capital is perceived to have a relationship with economic growth, productivity, and profitability.

Like any other asset, human capital has the ability to depreciate through long periods of unemployment, and
the inability to keep up with technology and innovation.

Understanding Human Capital

An organization is often said to only be as good as its people from the top down, which is why human capital
is so important to a company. It is typically managed by an organization's human resources (HR) department,
which oversees workforce acquisition, management, and optimization.

Its other directives include workforce planning and strategy, recruitment, employee training and development,
and reporting and analytics.

The concept of human capital recognizes that not all labor is equal. But employers can improve the quality of
that capital by investing in employees. This can be done through the education, experience, and abilities of
employees. All of this has great economic value for employers and for the economy
.
Since human capital is based on the investment of employee skills and knowledge through education,
these investments in human capital can be easily calculated. HR managers can calculate the total profits before
and after any investments are made.

Any return on investment (ROI) of human capital can be calculated by dividing the company’s total profits by
its overall investments in human capital.

For example, if Company X invests $2 million into its human capital and has a total profit of $15 million,
managers can compare the ROI of its human capital year-over-year (YOY) in order to track how profit is
improving and whether it has a relationship to the human capital investments.

Special Considerations

Human capital tends to migrate, especially in global economies. That's why there is often a shift from
developing places or rural areas to more developed and urban areas. Some economists have dubbed this a brain
drain or human capital flight. This describes the process that keeps certain areas underdeveloped while others
become even more developed.

Human Capital and Economic Growth

There is a strong relationship between human capital and economic growth, which is why it can help boost the
economy. That's because people come with a diverse set of skills and knowledge. This relationship can be
measured by how much investment goes into people’s education.

Some governments recognize that this relationship between human capital and the economy exists, and so they
provide higher education at little or no cost. People who participate in the workforce with higher education will
often have larger salaries, which means they can spend more.

Does Human Capital Depreciate?

Like anything else, human capital is not immune to depreciation. This is often measured in wages or the ability
to stay in the workforce. The most common ways human capital can depreciate are through unemployment,
injury, mental decline, or the inability to keep up with innovation.

Consider an employee who has a specialized skill. If they go through a long period of unemployment, they
may be unable to keep these levels of specialization. That's because their skills may no longer be in demand
when they finally reenter the workforce.
 
An individual's human capital may depreciate if they can't or won't adopt new technology or techniques.
Conversely, the human capital of someone who does adopt them will.

History of Human Capital

The idea of human capital can be traced back to the 18th century. Adam Smith referred to the concept in his
book An Inquiry into the Nature and Causes of the Wealth of Nations, in which he explored the wealth,
knowledge, training, talents, and experiences of a nation.1 Adams suggested that improving human capital
through training and education leads to a more profitable enterprise, which adds to the collective wealth of
society. According to Smith, that makes it a win for everyone.

In more recent times, the term was used to describe the labor required to produce manufactured goods. But the
most modern theory was used by several different economists including Gary Becker and Theodore Schultz,
who invented the term in the 1960s to reflect the value of human capacities.

Schultz believed human capital was like any other form of capital to improve the quality and level
of production. This would require an investment in the education, training, and enhanced benefits of an
organization's employees.

Criticism of Human Capital Theories

The theory of human capital has received a lot of criticism from many people who work in education and
training. In the 1960s, the theory was attacked primarily because it legitimized bourgeois individualism, which
was seen as selfish and exploitative. The bourgeois class of people included those of the middle class who
were believed to exploit those of the working class. The theory was also believed to blame people for any
defects that happened in the system and of making capitalists out of workers.

What are examples of human capital?

Examples of human capital include communication skills, education, technical skills, creativity, experience,
problem-solving skills, mental health, and personal resilience.

What is the relationship between human capital and the economy?

Human capital allows an economy to grow. When human capital increases in areas such as science, education,
and management, it leads to increases in innovation, social well-being, equality, increased productivity,
improved rates of participation, all of which contribute to economic growth. Increases in economic growth
tend to improve the quality of life for a population.

How can I increase my human capital?

Ways to increase your own human capital include more education, automating finances to improve efficiency,
expanding your horizons outside of your social and workplaces, obtaining more experience, increasing
participation in a multitude of activities or organizations, improving your communication skills, improving
your health, and expanding your network.

What is human capital risk?

Human capital risk refers to the gap between the human capital requirements of a company or organization and
the existing human capital of its workforce. This gap can lead a company towards inefficiencies, inability to
achieve its goals, a poor reputation, fraud, financial loss, and eventual closure. To reduce and eliminate human
capital risk, an organization should train, foster, and support its workforce.

ARTICLE SOURCES

Investopedia requires writers to use primary sources to support their work. These include white papers,
government data, original reporting, and interviews with industry experts. We also reference original research
from other reputable publishers where appropriate. You can learn more about the standards we follow in
producing accurate, unbiased content in our editorial policy.

Adam Smith. "An Inquiry into the Nature and Causes of the Wealth of Nations, Volume 1." Strahan, 1776.

Scholars at Harvard. "Human Capital," Page 1.

Schultz, Theodore W. "Investment in Human Capital." The American Economic Review, vol. 51, no. 1, 1961,
pp. 1-17.

What Is ROI?

ROI is better known as return on investment.

ROI, or return on investment, is a common business term used to identify past and potential financial returns.
Managers and executives look to the ROI of a project or endeavor because this measure indicates how
successful a venture will be. Often expressed as a percentage or a ratio, this value describes anything from a
financial return to increased efficiencies.

What is ROI?

Any expense a company has can be calculated in terms of ROI. While some expenses or activities – such as
buying staples or repairing an employee bathroom – may not have a direct or financial ROI, each expense
contributes to an overarching investment. For example, hiring a graphic designer to create ads, paying a
photographer to take pictures of the company, and overhauling the company’s website can be considered a
return on investment.

In many instances, ROI is used to calculate how much of a value an investment is. For example, an angel
investor would want to know the potential ROI of an investment before committing any funds to a company.
Calculating a company’s potential or actual financial ROI typically involves dividing the company’s annual
income or profit by the amount of the original or current investment.
ROI is also used to describe “opportunity cost,” or a return the investor gave up investing in the company. If a
business owner were to invest their money in the stock market, they could expect to receive an annual return of
at least 5%. By investing that same money in a company, an owner would expect to see a similar, if not higher,
ROI for their money.

Companies even use ROI to measure the success of a specific project. If a business owner were to invest
money in an advertising campaign, they’d analyze the sales generated by the ad and use that information to
determine the ROI. If the money generated exceeded the amount spent, then a business could consider it an
acceptable ROI.

When calculating your annualized ROI, you’re looking for the average yearly return on investment earned
during the investment period. This shows you how profitable the venture is, which is helpful, because ROI
doesn’t include the holding period of an investment within its formula. Annualized ROI can help you analyze
and compare the performance of your investment during specific time periods. 

Key takeaway: ROI measures the growth or loss of funds invested in a business venture.

Why is ROI important in business?

Only smart businesses that spend wisely and monitor ROI closely survive in the long run.
If you aren’t seeing an optimal ROI on a certain endeavor, stop throwing money at it; you’re better off
scrapping it. Continuing to spend on lost causes is a surefire way to run out of money and run your business
into the ground.

Key takeaway: ROI allows you to see the fruits of your investment or the lack thereof, which is important to
always have a handle on when running a business.

What is considered a ‘good’ ROI?

What’s considered a good ROI depends on the investment. When a company is spending money on a piece of
equipment, for example, the ROI is in productivity. Marketing spend, on the other hand, requires an ROI in
sales. The ROI you expect from your search engine optimization efforts will be different from the ROI you
look for from an investment in a new factory.

A healthy double-digit ROI is great for starters, and if you identify high-percentage ROIs, you should aim to
figure out how to amplify and extend those effects.

Consider whether you get an ROI at all and be realistic before signing contracts and spending money. Consider
it carefully, and don’t make any big purchases right away. Someone promising the moon is likely not going to
deliver good returns. That leads to the next topic: problems in achieving an ROI.

Key takeaway: Be mindful of where you invest your money; consider whether it will increase the profitability
of your venture and allow you to reach a healthy and higher ROI.

Challenges of ROI

Everybody thinks they can predict an ROI, but nobody can see the future. Averages can be found through big
data, but for most of us, only a well-thought-out investment will see positive returns. Blindly investing without
doing your due diligence is never a good idea.
Before investing in partners or clients, meet with them in person. Tour the facility and get to know the
business. Ask to see as much documentation as you can to verify, they are who they say they are. Anybody can
register a business and rent a commercial space; that doesn’t mean you’ll see a positive ROI.

For example, if you invested in Bitcoin in 2010 and sold it at the start of 2018, you made a bundle. If you
bought at the start of 2018 and are still holding, you’re probably not so happy. Two investors holding the same
investment can have very different experiences and views of it, depending on the timing.

Dig into the business’s financial history and all documentation. Without doing due diligence, you can expect
many unpleasant surprises.

Key takeaway: Doing the proper research before pouring money into a business venture will give you a better
chance of realizing a healthy ROI.

Limitations of ROI

You can gain a lot of financial foresight by calculating your ROI, but measuring your business’s success based
on an ROI has its limitations.

Here are three limitations to consider.

Your company’s cash flow is not directly reflected in your ROI, so your business’s financial health may not
always be measured completely or accurately using ROI alone. “For example, the ROI may be 5%, but it may
be losing cash flow and be a very costly investment,” said Robert Gauvreau, CPA and founder of accounting
firm Gauvreau & Associates. “Whereas another investment that is generating 4% ROI may be generating a
positive cash return to the investors. “Depending solely on ROI to evaluate the financial health of a project
only gives you a partial understanding of what’s affecting your finances.

To calculate an accurate ROI, you need a firm grasp of your future business expenses. If you don’t yet have
accurate numbers for future expenses, or if the numbers comprising your calculation are variable, such as
interest rates that may change, the ROI may be inaccurate. 

ROI only measures the financial success of a project. For example, investing in new computers and tech for
your employees may have a negative ROI, but it may make your employees happier and increase retention.
The ROI of a project or venture doesn’t account for the nonfinancial benefits of an investment.

Key takeaway: An ROI supplies specific information, which means that it doesn’t always speak to the entire
company. It’s a helpful calculation, but it is limited in the data it provides.

Benefits of ROI

Understanding your profits, and the impact of an investment on your business, is important and extremely
helpful when making decisions for your company.
Here are two more benefits that calculating your return on investment provides.  

Using an ROI allows business owners to track and analyze short- and long-term projects. “You can set simple
targets for both short-term and long-term goals, and ROI can measure if you are achieving those benchmarks
quickly and easily,” Gauvreau said. 

ROI helps you evaluate your business’s financial performance. Knowing your ROI keeps your company on
track by demonstrating whether your business is profiting above or below its average, said Leonard Ang,
realtor and chief marketing officer of iProperty Management. It’s a good reminder for companies to maintain a
standard for their finances.
Key takeaway: ROI calculations can help you analyze your finances and make quality decisions about the
future of your business.

ROI formula

One way to calculate ROI is to divide the net profit (return) by the amount that was invested:

ROI (%) = net profit / investment x 100

Another way to calculate ROI is to take the gains of an investment, subtract the cost of the investment and
divide the result by the cost of the investment:

ROI = (gains – costs) / costs

For example, let’s say you make a major purchase, like buying a home.

“You purchase your home for $1,000,000,” Gauvreau said. “After living in your home for three years, you sell
it for $1,120,000. The result, after three years, your home increased in value by $120,000.”

If we follow the ROI = (gains – costs) / costs formula, we find that the return on investment is 12%.
($1,120,000 – $1,000,000) / $1,000,000 = 0.12

Another example of ROI would be investing in the stock market, Gauvreau said. If you invest $100,000 in
Tesla stock, and then 12 months later it grows to $160,000, your ROI would be 60% because: 

 ($160,000- $100,000) / $100,000) = 0.6

Key takeaway: An ROI formula is a simple equation used to help business owners calculate the success of their
investments.

Learning from the past

ROI calculations are not intended to be precise methods of measurement, but rather ways to approximate.
More accurate projections always help, but some error is generally expected with ROI. Understanding the ROI
of any project or marketing campaign helps in identifying successful business practices.

Many companies use ROI to identify methods of marketing and advertising that yield the highest return based
on previous successes. This way, ROI becomes not only a measure of past success but also an estimate for the
coming months.

Key takeaway: ROI calculations are useful because they help you analyze the progress of your business, and
although they’re estimations, they can impact and improve the decisions you make for your company.

Finding and Retaining Investors

Investors provide starting capital for businesses, guidance for business development, and ensure that capital is
invested correctly. Finding investors is often the key to starting or expanding a successful business. Partnering
with investors is very important for fostering the growth of a business. Therefore, finding and establishing
strong relationships with investors can result in growth in your business which will increase revenue. There are
several types of investors: Angel Investors, Personal Investors, and Venture programs. These are different
types of investors who will have varying goals, but they all share the same purpose and goal: investing in a
company because they believe it will grow and become profitable. Many established companies have started as
small projects and expanded with the help of investors. Investors can be very beneficial partners for small
business owners as they have knowledge of the difficulties of developing a business. In addition to this, they
may have valuable input for future business decisions.

What are Investors looking for?

It is important to understand what Investors are looking for before they provide capital. There are several
things that all businesses should consider before reaching out to investors and asking for a specific amount of
money.

All the above-mentioned things are very important and they should definitely be considered before
approaching investors. Investors want to be sure that their investment will be profitable. They should clearly
see that the company has developed an effective business model, a clear understanding of its target audience,
and an adequate marketing plan. Investors are especially interested in new, innovative ideas. In other words,
they enjoy the idea of investing in something that is new to the market and has a huge potential for growth.
Investors expect businesses to have a straightforward answer to their needs from the investment firm. It is
always helpful if the individual that is approaching them has experience working in a specific field as investors
will find value in the experiences. It is also essential to define what issue your business will solve and what its
competitive advantage is. For example, if your company provides a solution to a common problem,
communicate this to the investor as it shows your value.

Debt Investors vs. Equity Investors

When looking into potential investors, it is important to understand the difference between debt investors and
equity investors. When working with a debt investor, they are lending you money with the expectation that you
will pay it back in full with interest. Usually, your company will be put up as collateral to secure this loan.
When dealing with equity investors, they are purchasing a percentage of your company and will make a profit
whenever they sell their share of the business. Debt investment can be good in many cases as you retain full
ownership of your business.
However, it has a few disadvantages as you need to pay back the debt and you usually need to provide
collateral. Equity investing also has advantages such as not having a loan to repay and forming a partnership
with your investors. This also comes with some drawbacks such as having to share profits and losing control of
parts of your company.

Angel Investors

An angel investor is a person with a net worth of a few million who is interested in supporting small
businesses/startups by offering investment. They are often former entrepreneurs who make investments to
make a return on their money and to participate in the entrepreneurial process.

Platforms like AngelList, FundersClub, CrunchBase can be very helpful for finding an investor that fits your
needs. Many angel investors also specify the type of businesses they would like to invest in. They will usually
ask for a pitch deck and one-pager to get an idea of your business before beginning to request more
information about your business.

Venture Programs

Venture capitalists are the most selective type of investors. To receive their funding, companies must fit into
their strict criteria of target companies to invest in. Venture capital is most effective when companies are trying
to become powerful enterprises. Their goal when investing in your company is to facilitate as much growth as
possible.

Keeping this in mind, it is very important for companies to identify their goals for the future of their
endeavors. If you are attempting to develop your business into a small family-owned company, venture capital
is not the correct choice.

In addition to this, timing is crucial to receiving their investment. The company needs to be established enough
to promise a successful future but cannot be too big to the point where the investors think your rapid growth
period has already passed. However, if you reach out to them too early, they might determine that the risk of
investing in your company outweighs the reward. It is important to note that this is one of the most difficult
types of investment to obtain. In addition, the process of seeking this investment is very time-consuming.

What is human capital management (HCM)?

Human capital management (HCM) transforms the traditional administrative functions of human resources
(HR) departments—recruiting, training, payroll, compensation, and performance management—into
opportunities to drive engagement, productivity, and business value. HCM considers the workforce as more
than just a cost of doing business; it is a core business asset whose value can be maximized through strategic
investment and management—just like any other asset.

The definition of human capital management

The term HCM can refer both to a business strategy and a set of modern IT applications and other technologies
that are used to implement that strategy. Though sometimes used interchangeably, the terms related HR,
HRMS, and HRIS do have subtle distinctions:

HR
Refers to a set of traditional employee management functions that includes hiring, job and position
management, HR compliance, and reporting.
HCM
Encompasses the same processes, but also includes workforce rewards and talent and workforce management

Talent management
Looks at the strategic management of talent throughout the talent lifecycle. It includes sourcing and recruiting
candidates, goal and performance management, learning and career development, talent review, and succession
management.

Workforce rewards
Refers to all HR functions that manage any monetary or nonmonetary rewards including compensation,
benefits, or payroll.

Workforce management
Involves all HR functions that are related to positive and negative time management including time and labor
and absence management.

HRMS
Refers to the set of applications and other technologies that support and automate HR processes throughout the
employee lifecycle. While the terms HCM and HRMS are often used synonymously, HCM puts particular
emphasis on the strategic approach to managing employees.

HRIS
Originally referred to keeping administrative employee records. It has been largely replaced by the term
HRMS. In practice, HRMS and HRIS are virtually interchangeable terms.

Key benefits of a HCM solution

A complete HCM solution connects all HR processes, including recruiting, global HR, compensation, benefits,
talent management, learning, workforce planning, work-life solutions, time tracking, and payroll.

With HCM solutions, businesses can make smarter and faster decisions, deliver a best-in-class employee
experience, and leverage embedded cutting-edge technologies, such as artificial intelligence (AI) and chatbots
to automate workflows, improve efficiency, and engage quickly.

Attract and retain talent

Increase hiring speed and quality by quickly sourcing and recruiting the right candidates
Increase engagement with work-life solutions that help motivate employees and deliver a superior employee
experience

 Retain and nurture talent by providing professional learning and growth opportunities
 Increase bench strength by proactively planning for succession in leadership and other key roles
 Respond with agility to change
 Align people strategy with business strategy
 Anticipate workforce attrition with powerful insights
 Adjust the workforce quickly to organizational changes
 Tailor HR processes to account for unique needs
 Optimize workforce management and spending
 Differentiate compensation by allocating the right mix of monetary and nonmonetary rewards
 Manage time and labor, scheduling, and related expenses
 Maintain expenses for specific projects and other costs
  Build a pay-for-performance culture
 Streamline HR operations
 Consolidate disparate HRMS
 Leverage analytics for more intelligent workforce decisions
 Automate manual processes globally and locally
 Accelerate HR processes with self-service

The functional components of HCM solutions

HR
Simplify your HRIS systems and manage your entire workforce with a single, global system of record.

Employee lifecycle: Manage from hire to retire for all employees, full-time and contingent, with localizations
for more than 200 countries and jurisdictions.

Strategic HR: Track personal and employment information, create job structures, manage employee
documents, and predict performance and attrition with a single solution.

HR service delivery: Enable manager and employee self-service on any device and provide an HR Help Desk
for sensitive HR cases.

Employee engagement: Motivate your people with wellness, competitions, volunteering, and personal
branding tools.

Compliance and fraud detection: Improve health and safety through incident reporting and safeguard your data
through fraud detection and autonomous security.

Talent management

Enable organizations to manage the entire talent lifecycle—from effectively sourcing and recruiting to
onboarding new hires, managing goals and performance, rewarding for performance, providing continuous
learning, developing careers, and conducting talent reviews and planning for best-fit successors—all while
keeping employees engaged.

Talent acquisition: Present a compelling candidate-centric experience and match the best-fit candidates to jobs
by leveraging innovative technologies.

Performance management: Align individual and business goals and support employees with frequent
checkpoints to optimize performance.

Career development: Identify career opportunities and maintain a development plan to bring employees closer
to their career goals.

Talent review and succession management: Evaluate macro-organizational talent trends and proactively plan
for future needs in leadership and other critical roles.

Learning: Meet the learning demands of the modern workforce and keep employee skills current. Leverage
embedded intelligence to provide a tailored learning experience.

Workforce management

Control labor costs, reduce manual processes, and simplify compliance for all of your employees, globally.
Compensation: Analysis, modeling, budgeting and administration of local and global compensation plans.

Total compensation: Deep insight into all compensation activity to executives, managers, and employees.

Pay-for-performance: Leverage performance ratings, goal attainment, and other metrics into compensation
calculations.

Workforce rewards

Attract and retain the right talent and drive value through a differentiated workforce rewards strategy.
Maximize the accuracy of payroll and compensation data using modern and innovative technology.

Compensation: Analysis, modeling, budgeting and administration of local and global compensation plans.

Benefits: Deliver flexible benefit program options that adapt to unique business needs.

Payroll: Process payroll and support compliance by delivering accurate payroll, tax reporting, and regulatory
rules.

What is human capital management (HCM)?

Human capital management is a comprehensive set of practices and tools used for recruiting, managing, and
developing employees.

HCM connotes an approach to human resource management that views employees as assets to be invested in
and managed to maximize their business value. HCM goes beyond the traditional and mostly administrative
functions of HR to include more strategic disciplines, such as talent management and employee engagement.

HCM also refers to the category of software that organizations use to automate the recruitment, management,
and development of their workforces.

Why is human capital management important?

HCM addresses most organizations' biggest investment: people. Investing in human capital can boost
employee creativity and productivity, and ultimately, an organization's profitability. Failure to practice HCM
can result in missed opportunities, lost revenue, and higher labor costs.

HCM can also help organizations stay ahead of major workforce trends, such as the following:

Changing demographics. As the workforce ages, new generations of workers bring different styles and needs.
For example, Generation Z and millennials generally have high expectations for work-life balance.

Gig economy. The upsurge in temporary jobs by contractors and freelancers complicates scheduling, contracts
and compliance with tax and employment laws.

Complex legislation. Laws and regulations change quickly, and noncompliance can lead to hefty fines and
legal fees. For example, in the U.S., the Affordable Care Act, Family and Medical Leave Act, and sexual
harassment laws put added pressure on organizations to stay abreast of legislation.

HR data. Organizations collect massive amounts of internal and external data about their workforces. HCM
technology can help manage and analyze it.
HCM functions

The functions of HCM software are generally organized into the following categories:

Core HR, including payroll, benefits administration, onboarding (bringing employees into the organization),
compliance management and maintenance of employee data.

Talent management, the process of recruiting, developing and retaining employees. Talent management suites
consist of distinct yet integrated modules for recruitment, performance management, compensation
management, learning and succession planning.

Workforce management, the set of functions for deploying employees with the necessary skills to particular
regions, departments or projects. It includes time and attendance management, workforce planning, labor
scheduling and budgeting.

Service delivery, including HR help desks, intranet portals, employee self-service and manager self-service.

Woven throughout or working alongside these HCM components are several important technologies: analytics,
social media, collaboration, and mobility (see figure).

Most HCM software suites handle all the main functions of HR.

Analytics is the critical element in making HCM more strategic and aligning it with the financial success of a
company. Sometimes the analytics tools are localized to a particular HCM function: For example, workforce
analytics can assist with workforce optimization. Social media and collaboration tools can facilitate the
frequent feedback and communication required for continuous performance management.

HCM software

The HCM category of software includes any application that handles an HCM function, such as recruiting or
performance management, regardless of whether it is integrated with other HCM applications or sold by a
single vendor.

However, software "suites" that support all the typical functions of HCM have become the norm. HCM suites
are sold either as components of ERP systems or as separate products that are typically integrated with ERP.
Among the many vendors are ADP, BambooHR, Ceridian, Cornerstone OnDemand, Infor, Oracle, SAP
SuccessFactors, UKG (formerly Ultimate Software and Kronos) and Workday.

Most organizations have a mix of HCM applications, though they usually try to integrate them to work like a
single system. It is common to have an older human resource management system (HRMS) running on
premises (on the organization's computers) that is connected to a newer talent management or HCM suite
running in the cloud, on the vendor's computers and delivered to users over the internet. In recent years, on-
premises HRMS has been superseded by software as a service (SaaS) HCM. In this type of cloud computing,
the vendor usually runs one copy of the software that is shared by different customers and delivered as a
service, which is usually cheaper and more standardized than on-premises software or other types of cloud.

In its 2020 Magic Quadrant report on cloud HCM suites, the Gartner research firm predicted that 60% of
enterprises with more than 1,000 employees will invest in an HCM suite by 2025. It noted, however, that they
would still need to source 20% to 30% of their HCM needs from other applications.

HCM vs. HRMS

HCM is one of several HR terms that sound similar and are often confused.

HCM is both a set of HR processes and the name of the category of software. In contrast, an HRMS is a set of
integrated software applications and other technologies used to manage HR processes, especially core
administrative ones like employee records, payroll and benefits. HR professionals will often say they have
installed "an HRMS," and software vendors sometimes use the term for their suites, though HCM is more
common.

HRMS is nearly synonymous with an older, less commonly used term, human resource information
system (HRIS). Some people use HRIS to mean just the core administrative system, and it is the preferred
acronym for the IT positions in HR departments.

Of the three, HCM is a much broader umbrella term for HR software and the one most often used by vendors.

Challenges of human capital management

Motivating people to do their best is inherently challenging, but certain areas are notoriously difficult to
manage and optimize, according to HR managers.

Employee engagement is the term used to define the emotional connection employees have to the workplace, a
factor known to affect productivity, profitability, and customer satisfaction. Employee engagement is hard to
measure and improve, but companies try numerous methods, such as collaboration tools and employee
surveys, and by making key employee processes like onboarding as seamless as possible.
Leadership development requires a serious, sustained effort to recognize employees' potential for leadership
positions and provide effective training.

Compensation and benefits. Organizations strive to get accurate, comparable data on industry rates and adjust
their packages to stay competitive.

Succession planning requires a view of future organizational change that is difficult to see amid more pressing
needs. Many companies do an adequate job of planning transitions for senior executive positions, but there is
growing recognition that the mass retirement of baby boomers will call for succession planning at other levels.

Learning management affects numerous HCM issues, but older learning management systems are often
incompatible with newer, web-based training sources, and educational content is hard to curate effectively and
affordably.

Employee retention avoids the many negative effects of employee turnover -- loss of institutional knowledge
and higher recruitment costs, to name two big ones -- but some companies find it difficult to acknowledge why
employees leave, and boosting retention requires an HCM strategy that is firing on all cylinders.

History of human capital management

The term human capital dates to the 17th and 18th centuries when economists such as Adam Smith aimed to
quantify the value of labor productivity and earnings. Economic theories continue to influence HCM by
providing support for the concept of employees as investments whose value to an organization depends on how
skilled, productive, and creative they are.

However, the true beginnings of HCM are found in the precursors to HR. The formalization of worker
management into a discipline began with the growth of scientific management theories around the turn of the
20th century, including studies by Frederick Taylor about worker efficiency. Industrial psychology, another
discipline born in the early 20th century, addressed the factors besides pay that influence worker productivity,
such as the Hawthorne effect, an increase in output caused by being watched.

Meanwhile, the rise of labor unions spurred companies to address worker compensation, safety, and health.
Some sources say this is also when references to people as a "human resource" first appeared.

In the 1920s and 1930s, worker protections in social programs such as U.S. President Franklin Roosevelt's
New Deal led to the rise of industrial and labor relations as a formal discipline in corporations and
governments.

Around this time, personnel research became popular in academia and corporations started personnel
departments. The field of personnel administration grew rapidly during World War II, and associations were
formed to further it as a discipline for hiring, evaluating, and compensating employees.

By the latter half of the century, organizations gained more appreciation for the idea that employees should be
viewed as assets to be maximized. Some academic and public policy experts began using the term human
resource to convey this idea, and personnel management soon gave way to human resource management as the
name of the discipline.

Future of human capital management

There are good reasons to believe that today's HCM trends will only intensify, and advanced technologies that
have emerged in recent years will begin to realize their full potential.
The new technologies are mostly being used to make HCM processes more automatic, intelligent and easy for
employees and HR professionals. AI, including machine learning and natural language processing (NLP) is
infiltrating most aspects of HCM.

For example, recruitment chatbots use NLP to engage in realistic text and voice conversations with job
candidates. Machine learning parses resumes, saving human recruiters much of the tedium. It also analyzes
video interviews and recognizes patterns in the performance reviews of high-achieving employees that it uses
to evaluate candidates. Machine learning is also being applied to learning management to make Netflix-like
recommendations for online training by analyzing the career paths and performance of employees.

AI-enabled chatbots, along with robotic process automation, are increasingly taking over HCM workflows for
HR staff, but also greasing the skids in employee and manager self-service applications.

Such automation of repetitive HR tasks will, in theory, allow HR professionals to spend less time moving
documents and answering basic questions and more time engaging in strategic work, such as talent
acquisition and succession planning.

Workforce trends that were rising in the past decade have been intensified in the COVID-19 pandemic. In
particular, the sharp increase in the number of full-time, work-at-home employees during the pandemic has
required HR departments to hire remotely and foster engagement with remote workers through up-to-date
training and onboarding tools, as well as team collaboration platforms such as video chat and messaging.
These approaches and tools will likely continue, even as workers return to the office.

Finally, the contingent workforce -- temporary workers and freelancers -- will increasingly come under the
purview of workforce acquisition strategies that depend on integrated HCM technology to manage full-time,
part-time and contingent workers as a single talent pool.

6 Areas of HR That Every Organization Should Manage

Let’s be real – managing people is not why an entrepreneur goes into business.
Small business owners often lack the interest or skill-set to manage their most valuable asset – their human
resources.

This art of managing people is complex and a science of its own.

There are entire degree and certification programs to teach the experts how to deal with the often-complex
issues that come with managing a workforce.

Managing people is much more than hiring and scheduling workers.

It is creating an environment that employees thrive in and get excited to be a part of. And, that takes focus,
strategy, and tireless effort.

6 Areas of HR That Every Organization Should Manage

1.  Compensation and Benefits

Successful organizations understand the importance of providing competitive compensation and benefits to its
employees.  

Staying current on salary trends is critical to attracting and retaining top employees.

In today’s job market, good employees will look for a position down the street if they think they will be better
compensated.

A total compensation package should be part of a comprehensive compensation strategy and should include

base pay and any other employee benefits – health, life, dental, disability insurance, paid time off, etc.

Employee compensation and benefits should be budgeted and managed through an annual budgeting process.

2.  Recruitment and Staffing

It can be challenging to find the right employees for your organization.  

Recruiting and screening applications can be a tiring chore but with electronic screening programs, it can be
very manageable.

There are many software programs and websites that can help with this.

There are many vendors that can help with payroll services but also can help with the application process,
screening, and employee background checks. 

Often the fees for these services are reasonable and very affordable.

3.  Training and Development

Training employees is key to maintaining high levels of employee performance and is considered an important
benefit for employees.

Employees need to learn the culture of the organization, their specific job duties, and continuing education to
maintain changing job skills.

a.  Organizational Orientation

Orienting employees helps them get acclimated to the new work environment.
The structured process answers important logistical questions that the employee might have.

For example, the orientation will share information like building keys, access codes, review of the employee
manual, how to operate the phone system, computer system, copy machine, fax machine, standard procedures
for requesting time off, who to call when sick, how to confront and address internal issues.

Taking the time to orient new employees helps to eliminate problems that arise as a result of them simply not
knowing or understanding something about the work environment.

b.  Department Orientation

This next level of orientation allows the new employee to get acclimated to the specific department they will
be working in.

There are cultures within cultures making it important for employees to get to know co-workers, the culture of
the department, and basically “how things are done around here.”

c.  Job Training

Whether an employee is learning how to answer the telephone for their department or how to operate a piece of
machinery, it is critical to have a documented, very descriptive job description outlining:

 who the employee reports to

 work hours
 specific job tasks and responsibilities
 individual SMART Goals with due date

d. Continuing Education

Job skills are changing rapidly making it important for organizations to invest in the continuing education of
their workforce.

Employees should be required to maintain skills and develop new ones.

This can be done by in-house training, local seminars, or industry conferences.
 
A highly trained workforce helps to ensure high-quality products and services for your customers.

4.   Employee Relations

A workforce of engaged employees can have a high correlation to increased productivity and improve the
bottom line.

This suggests that having a plan to develop and sustain good employee relations is an important aspect of the
HR management function.

It is important to have a process in place to deal with employee issues that will inevitably happen.

Effective conflict management in the workplace is important to successful work teams.

We all have issues in our personal lives so it is also important to have a process in place to help employees
deal with these types of issues to ease the burden and stress that personal problems bring to the workplace.

For example, allowing an employee to work a flexible work schedule while caring for an ill family member
can take some of the stress off the employee.

5.  Employee Satisfaction

Monitoring employee satisfaction is important for understanding the employee’s perception of how well the
organization is managed.

It asks the question, “how are we doing managing the operation?”

Employees on the front line do the work and have a unique perspective of not only how things are done, but
also how the customer views the organization’s products and services.  

By simply asking the question, managers can learn a lot.

And, if what is learned is put into an improvement plan with SMART goals, an organization can make great
strides in improving how they operate – resulting in higher levels of customer satisfaction.

6. Labor Laws and Legal Compliance

There are countless laws that govern how organizations manage operations and labor.  
Staying compliant is an important part of business management.
 
SHRM is also a great organization that helps business owners keep updated on changing employment laws.

Healthy and successful organizations spend time and resources to develop a strong HR program that supports
employees.

Employees who understand what is expected of them, are given the tools to perform the job and get rewarded
for doing a good job to make customers happy.  

And, happy customers tell others of their great experience and come back.

But most importantly, the customer pays the bills so employers need to take care of the people (employees)
who ultimately take care of the customers!  That is what human resource management is all about!

Source:
6 Areas of HR That Every Organization Should Manage – The Thriving Small Business