Human capital management (HCM) definition

Human capital management, often abbreviated to HCM, is the set of practices and software used for recruiting, managing, and developing an organisation’s human capital – aka its workforce. The software, specifically, is often called human resources management systems (HRMS), and is what is used to accomplish and optimise workforce management tasks in line with organisational goals.

Why is human capital management important?

In the last few years, driven by the pandemic and alternative working patterns, UK HR operations have seen more change and disruption than they’ve done in the preceding two decades. Yet, the core priorities of human capital management – or HCM – remain the same, including functions like recruitment, onboarding, training, and payroll.

What’s changing fast is the demand that HR departments have come under to become centres of business innovation. Today, they need to deliver data-driven insights and analytics, and support compliance across entire global operations. As a result, they find themselves at the centre of shifting working patterns, and how employers and employees engage with each other and with their jobs.

The UK’s workforce is diverse and dynamic, and smart, connected technologies have become essential in managing this complexity. This is where modern HCM solutions are being introduced. They are revolutionising the nature of work, how people collaborate, and the way companies are managed. Artificial intelligence (AI), for instance, can now automate routine tasks and offer far greater insight than was available in the past. While virtual reality (VR) can help to craft rich, immersive training experiences, and blockchain can quickly verify data accuracy and ensure security and compliance.

Of course, mobile and cloud capabilities open up new collaboration possibilities and freedom for an untethered workforce. Together, these technologies are shaping new possibilities and helping spark innovation.

How has the HCM practice evolved over the years?

The term “human capital” was coined in the early 1960s to reflect valuable employee skills that could be cultivated to drive business growth. Standard regulations around fairer employment practices were introduced for the first time, and there was a growing recognition of the importance of employees’ well-being and satisfaction.

With the introduction of the internet and a demand for faster information sharing, companies began to rely on early HCM systems more and more – to help them manage the increasing complex world of work.

Today, the demands placed on UK-based HR teams are greater than ever – with a workforce that is far more diverse and geographically distributed. Data from the Office for National Statistics shows that 37%[1] of the UK workforce now works from home, some or all of the time. So a Bolton-based business might employ staff as widely distributed as Truro and Inverness.

Employee expectations have also changed, with employee experience now an essential factor in employee recruitment and retention. HR has had to adapt to better meet evolving needs and expectations.

And so, advanced technologies are now essential to help HR manage this complexity. To this end, unified, AI-powered solutions are helping HR to integrate teams, analyse and leverage complex data, and streamline basically almost all components of HR administration and management.

[1] Office for National Statistics, Public opinions and social trends, Great Britain: working arrangements, 5-28 July 2024

HRIS vs. HRMS vs. HCM

What is a human resources information system (HRIS)?

HRIS systems support and automate core HR processes such as benefits administration, time and attendance, payroll, and other workflows. The ‘information’ in a HR information system refers to the management and storage of employee data. The best HRIS systems bring together a wide variety of records and data in one single view for employers and employees, but support appropriate access management and control for security and privacy purposes. A HRIS is typically included in a HCM suite (or HRMS).

What is a human resources management system (HRMS)?

A HRMS contains all the functionality of the HRIS system plus additional talent management and learning capabilities. A HRMS incorporates smart technologies and advanced analytics to add an increasingly strategic component to HCM operations.

What is human capital management (HCM)?

As outlined above, the term HCM refers to both a business practice and a HR management strategy, as well as the suite of technological and software tools that support those activities. A HCM system is often referred to as a human resources management system (HRMS) and includes HRIS software.

Explore key components and functions of HCM software

HCM comprises a broad range of essential HR activities, not all of which are digital. However, as the capabilities and of modern HR software increase – along with its agility and ease of use – HR teams become increasingly reliant on integrated HCM systems to keep their operations running smoothly.

Here are the key benefits of HCM software for UK businesses:

• Employee experience management: Employee experience management is all about understanding why employees feel the way they do about their experiences at work, from their first day to the day they leave, and everything in between. UK businesses have a range of technologies and tools at their disposal to help gather this information, like our voice of the employee (VoE) processes, which combines 360 feedback assessments, surveys, behavioural and sentiment analysis. Using these insights, UK organisations can personalise each employee’s experience during their time at the business, boosting both their engagement and productivity.
• Core HR and payroll support: HCM software supports all the administrative functions needed to manage the day-to-day – from employee data, payroll, and benefits to essential services. To get the most from their HCM deployment, UK businesses should combine their cloud-based HCM systems with a mobile-first approach to streamline these processes. This supports self-service and real-time access to a single source of HR data, and is compliant with data privacy mandates. What’s more, these core HR processes can be supported using HRIS software.
• Enhanced talent management: Modern processes for managing talent span recruiting and onboarding, compensation, and performance management, learning and development, and succession planning. In short, it’s everything needed to hire and retire the skilled employees that are so critical to business success. UK businesses should embrace integrated and automated talent management tools to make it faster to source and hire applicants through internal and external job postings, benefit from two-way communication via mobile devices and chatbots, a streamlined contract process, and candidate tracking and pre-onboarding. There’s also features that support employee goal setting and tracking as well as ongoing coaching and feedback that can help to better evaluate, promote, and compensate top-performing employees.
• Superior people analytics and workforce planning: Analytics and workforce planning is evolving rapidly and now supports data-driven decision-making across all HR processes. It provides metrics and KPIs, reporting, predictive workforce modelling, AI-powered analytics, and more to support strategic and operational planning as well as budgeting and performance management.

The benefits of HCM

In the digital age, the importance of talent management and strong HCM strategies can’t be overestimated. Building a future-ready workforce requires more than just attracting and onboarding the right candidates in an efficient way – though that’s also crucial. To combat a shortage of skilled workers in a fiercely competitive landscape, UK businesses need to adopt a holistic approach.

Best-in-class HCM software can help you create compelling compensation and benefits packages, while also giving you the tools to up- and re-skill your existing workforce, which as the Confederation of British Industry finds, is now an imperative ahead of the end of the decade. Moreover, this software can create an internal talent pool, develop a new generation of leaders, and provide engaging employee experiences that keep everyone invested.

Here are some of the many other benefits of HCM software that you should know:

1. Boost productivity: Human capital management software can simplify and automate many HR workflows and processes to help your workforce be productive.
2. Fast data-driven decision-making: These systems centralise employee data, automate insights, and offer advanced planning and predictive analytics features so you can make faster, evidence-based HR decisions.
3. Motivate and engage employees: By providing a personalised employee experience and next-gen tools, such as virtual employee assistants, you can keep employees motivated and engaged, which lowers absenteeism and attrition.
4. Strengthen HR compliance with global and local regulations: HR policies and regulations are always changing. HCM software can help you keep up and comply with regulations, such as the UK’s Right to Flexible Work or protection against Unfair Dismissals, as outlined in the UK government’s ‘Plan to Make Work Pay’.

Cloud HCM and the future of HR systems

According to Gartner “By 2025, 60% of global midmarket and large enterprises will have invested in a cloud-deployed HCM suite for administrative HR and talent management.”

So, what does this mean exactly? Well, most companies – regardless of their size – are already using some cloud-based HR solutions. This could include time tracking apps, payroll systems, and a variety of standalone HCM applications. But having multiple, single-purpose applications in the cloud is not the same as having a unified cloud-based suite of solutions.

Standalone apps from speciality vendors can be great for a particular purpose, but they typically don’t talk to each other nor integrate with your core business systems, like an ERP. For example, entries from a time tracking app can’t be analysed alongside performance or payroll data. In this case, managers don’t have a unified view of their whole workforce and related activities.

What modern UK businesses  don’t  need is a proliferation of one-off speciality applications. What they  do  need is more time, less inefficiency, and fewer silos. They want the ability to see across their entire workforce from a single control tower and be able to access data and customise real-time reporting anytime, anywhere. They want their employees to feel empowered with self-service tools and their HR teams to be more productive and supported.

Cloud HCM solutions are agile and scalable – and they integrate seamlessly with the tools you’re already using, rather than trying to integrate them ad hoc, with a growing number of apps. Cloud HCM supports a unified, centralised HR service with faster and more user-friendly solutions.

HCM and ERP integration: The best of both worlds

ERP systems are used to manage many core activities including accounting, procurement, supply chain, R&D and many more. ERPs can integrate a multitude of business processes and amalgamate disparate datasets for analysis and reporting. They help to unify operations and provide a single source of truth across the organisation.

When HCM and ERP systems are integrated, the combined power of both systems helps to synchronise workforce management with overall business objectives and priorities.  This can optimise staffing and seasonal hiring for supply chains (such as for UK retailers around Christmas), provide better analysis of employee performance through sales and lead acquisition records, and offer a generally better, more predictive view of potential gaps in staffing or shifts in business needs.

When choosing your HCM solutions, be sure to consider the ease of ERP integration. After all, HR data is not going to get less complex, demands for accountability aren’t going to lessen, and you’re never going to want less real-time visibility across your business operations.

Learn more about SAP HCM systems

Discover how SAP SuccessFactors HCM software connects your HR processes and competencies throughout the employee lifecycle whilst helping you find the right-fit solutions for your unique needs. At SAP, we organise these into six pillars of HCM:

• AI for human resources
• Core HR and payroll
• Talent management
• Workforce management
• Time tracking
• Sales performance management

Human capital management FAQs