Examples Of Human Capital – You’ve probably heard someone in a leadership position say, “Our employees are our greatest asset,” at one time or another.
While most of us would agree (I mean, who wouldn’t??), what does it really mean when we call people “assets”? Does this mean they have economic value, such as buildings, inventory or equipment?
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Renovating a building will generally increase the value of the building, and inventory sitting on the shelf for months will generally decrease. But how do you measure the value of an intangible asset like an employee?
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The practice of human capital management, or “HCM” for short, has become increasingly prevalent over the past few decades. There are several reasons for this.
One is that people recognize that the workforce is an organization’s greatest asset. Second, for many companies, their personnel costs are often their biggest expense.
As a result, HCM has become the driving force behind many new business practices, a growing array of human capital management software solutions, and an emphasis on the concept of human capital as a competitive advantage.
The purpose of this article is to teach you the essence of HCM and why it is important, using simple terminology and clear business concepts.
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Maybe you’re an HR professional looking to upgrade yourself or your colleagues, or you’re the manager, owner or founder of a startup or small business.
Either way, this will give you the basics of HCM and get you started with it in your organization.
Human capital is the economic value that comes from things like an employee’s experience, skills, knowledge and abilities.
Human capital is an intangible asset, unlike tangible assets such as buildings and equipment. However, both tangible and intangible assets have economic value.
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Human capital, like other forms of capital, can be measured and developed and provides a return on investment (ROI).
Although it may seem callous to refer to people and employees as “capital” – and some joke about the similarity between the words “capital” and “livestock” – it can actually help an organization to change its perspective and see employees as assets that can grow in value .
Organizations that focus on activities such as learning and development initiatives, health and wellness programs and specialized skills development. These provide rewards for both the individual employee and the organization.
Human capital management, or “HCM” for short, is a set of organizational practices related to the acquisition, management and development of the human workforce – or human capital – within an organization.
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The goal of HCM is to optimize and maximize the economic or business value of an organization’s human capital to gain competitive advantage. Effective human capital management enables an organization to successfully pursue human capital initiatives.
In his book Human Capital Management: Leverage Your Workforce for a Competitive Advantage, author Mark Salsbury writes, “Human capital initiatives (HCIs) are broad goals or objectives that an organization strives for that rely heavily on the people of the organization .”
Salsbury also points out that HCIs are strategic, not tactical, and then gives a number of examples:
While this is a very useful list, many of these large initiatives require considerable time and resources and are only really useful for larger, established organizations.
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Certainly, most startups and early-stage companies are not involved in global or international human capital initiatives. For founders, CEOs, and leaders in these organizations, it’s important to know that HCI correlates with company size.
Looking back at Salsbury’s definition, he talks about “comprehensive aims or objectives”. Depending on what your company looks like, it could be a “big” initiative that affects all five employees in your organization.
As you can see, all of these HCIs require people in the organization to implement them and will ultimately contribute in some way to the acquisition, management and/or development of the organization’s human capital.
Human capital management and human resource management, or “HRM” for short, are closely related, but they are not the same thing.
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The goal of effective HCM is to optimize and maximize the value and ROI of the human capital (employees) in the organization.
In contrast, the purpose of HRM is to create and manage the systems, processes, and policies necessary to hire, train, retain, and enable employees to do their jobs.
“Human capital management is inclusive because it includes not only HR practices, but also other work practices and people management strategies that improve organizational performance. An important difference between human resource management and human capital management is that human capital extends far beyond the HR function and encompasses the organization’s entire human resource strategy. Human capital belongs to all business leaders and resides with everyone in the organization.”
Effective human capital management usually requires effective human resource management practices – talent management, workforce management, appropriate benefits management, succession planning, etc.
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As a result, HCM systems and operations are often managed by an organization’s human resources (HR) department. In organizations without a professional, dedicated HR team or individual, HCM often falls under the direction of a senior manager responsible for HR activities.
A human capital management system is the joint operations, personnel processes and technologies that enable the acquisition, management and development of an organization’s human capital in an organized manner and at scale.
The HCM system takes a broad view of human capital for the entire organization. While individual managers, teams, and departments may have specific human capital management practices specific to them, in organizations with an HCM system in place, these practices are often driven by broader organization-wide practices.
For example, new hires on a technical team might receive training on certain team-specific software tools when they start, but that training would only be part of a broader onboarding program that every new hire in the organization would go through.
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These are the key elements required for a human capital management system. I have explained them in more detail below the picture:
These elements can sound huge, intimidating, and complicated, but they don’t have to be. An HCM system can be put in place by any size of business, from start-ups to large, established companies.
For example, perhaps your HCM system consists of an Excel spreadsheet to manage employee data and quarterly HCM team meetings where you review ongoing human capital initiatives.
The key is to start somewhere, even small, to build the rhythm and habits necessary for long-term success in human capital management.
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Hopefully at this point you should have a better understanding of what human capital management is, but why is it important? Why is human capital management important?
Smart leaders are increasingly aware of the importance of human capital management as a competitive advantage. Data shows that companies that focus on engagement, well-being, corporate culture and employee development within their organization tend to outperform their competitors.
An article from App Economy analyzed Glassdoor’s 2019 “Best Places to Work” ranking, which Glassdoor has done every year since 2009:
“Looking at the top 20 public companies over the past 10 years, 60% beat the S&P 500, and 91% had positive returns through June 2019.” App Economy also found that “the top public jobs more than doubled returns of the S&P 500 over the past 10 years.”
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The effective use and inclusion of an organization’s human capital has also been proven to have a direct impact on a wide range of organizational KPIs (Key Performance Indicators), including productivity, employee turnover, product quality, occupational safety and customer satisfaction.
Gallup’s State of the Global Workplace 2022 report links employee engagement—feeling highly engaged and excited about their work and workplace—to a number of business outcomes and the overall performance of work culture.
They reported that most employees are not involved; worldwide, the percentage of adults who work full-time for an employer and are engaged in work is only 21%.
Gallup also provides some compelling metrics that show how business units in the top quartile of global employee engagement are performing compared to those in the bottom quartile.
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Effective human capital management is critical to ensuring the health and success of your business and allowing you to compete in an increasingly competitive world.
Making HCM a priority helps you attract, retain and engage the talented, high-performing people you need to succeed, from finding the right talent to engaging and supporting the employee experience throughout the employee lifecycle.
The world of work is constantly evolving and, as we have seen in the examples above, organizations that prioritize human capital management are more successful over time.
Now is the time to ask how you develop the people in your organization and enable them to be successful.
What Is Human Capital Management & Why Is It Important?
What people, management processes and practices do you already have in place to begin building a human capital management system? Which ones are you missing and working on?
Does your organization have a vision (goal) and a set of goals that guide your approach to your people – your “human capital”? Are you benefiting from an HCM solution?
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