Human Capital Management Explainer

New ways of working require new ways of managing human capital. Here is why human capital management and leadership capital management are more important than ever.

By: Leadership Dynamics team

07/12/2022

5 min

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Human Capital Management: What Is It and Why Is It Important?

Although human capital management has been around for decades as a way to drive efficiency and gain competitive advantage, the pandemic dramatically changed the way we work. With hybrid/remote working here to stay, the dynamic between employees and managers has been reshaped, demanding a rethink on priorities when it comes to hiring.

The way we view human capital management needs to evolve. Hiring for skills and experience is important, but not as important as beliefs and behaviours. 

For investors and leadership teams at high-growth companies, having the right employees in place is critical to achieving the goals of the value creation plan. So, we’ve written this explainer guide to help you understand what human capital management means today, why it’s more important than ever and how you can avoid falling behind.

Contents:

  • What is human capital management?

  • Why human capital management is important

  • Why it’s more important than ever

  • How to improve human capital management

  • What is leadership capital management?

  • What is human capital management software?

What is human capital management?

If human capital is the value of a worker’s experience and skills, human capital management is their effective application – a way to optimise and maximise their value and ROI.

It’s important to note that HCM looks not only at the value of individuals, but also the structures of groups, teams, and departments.

Running a human capital management plan is about building a complete strategic overview of every employee asset in your company, identifying what skills are available and assessing whether those skills are being used appropriately and effectively; gathering insights about the organisational structure, before changes can be implemented. All while communicating the plan to employees to gain buy-in and avoid tensions during changes.

This process can be triggered by large-scale human capital initiatives, such as implementing new business models or internationalisation, which tend to only happen in large established companies as they require a lot of time and resources that high-growth portfolio companies need elsewhere.

Today it’s well known that human capital management is a source of competitive advantage. Companies that focus on employee engagement, health and well-being, culture, training and development outperform their competitors. A study of the 20 best places to work in the US, as rated by Glassdoor, for the ten years up to 2019 showed that 60% of them outperformed the S&P 500 and 91% had positive returns.

Why is human capital management important?

HCM is all about driving efficiency. If people are your greatest asset, they also tend to be the biggest financial expense. So having the wrong people in the wrong job can also be your greatest liability.

When an employee suits their role, their values align with the organisation’s (i.e. they want to succeed!) they can be productive without much oversight. If they are not suited to the role or even your company, they might require KPI management just to get their basic outputs. A manager has to keep them focused and productive.

An unsuitable team member alters the dynamic of a team. Teams like this can form subcultures, which contradict the culture of the entire organisation, and severely impact the success of the company.

Why it’s more important than ever

The economic downturn in the UK and the mass redundancies in tech companies is causing upheaval in human capital management. Not only that, but the trend towards hybrid/remote working is transforming not just how employees operate, but also how company culture is maintained. 

In an office environment, hiring for personality and experience works because it’s easier for managers to impose behaviours, goals and culture on a team through KPI management. Remotely, you lose context and people revert to their default behaviours, which may not be the behaviours that will make your company successful.

How will an employee behave if left to their own devices? Will they:

  1. work in the interest of your company? 

  2. need to be influenced and incentivised by managers? 

In this case, having to manage someone is almost an admission of failure. If they were the right person for the job, they wouldn’t need managing. Extra layers of control over employees are inefficient. The time and resources spent overseeing someone with the wrong behaviours could be better spent elsewhere.

This puts the emphasis on hiring for behaviours at the outset, rather than hiring for personality and experience. As Ben Reiter wrote in his book about the extraordinary success of the Houston Astros, Astroball:  “hire the culture you want.” 

Hiring the culture you want doesn’t mean hiring people who come from the same background as you, or the personalities you get on with. It means finding those people who most naturally align psychologically with what you are trying to achieve. If you run a high-growth company in private equity, you want A players only. There is no point in hiring B players and then trying to manage them into becoming A players. It just won’t happen.

In fact, hiring for behaviour does more for diversity and inclusion, because it does not matter where someone comes from or where they have worked before. 

Hiring managers often overemphasise experience within the industry over beliefs and behaviours. But experience does not tell you if your new hire is going to make your company achieve excellence. It is all about knowing how they will behave and react in order to make themselves and the company they work for success.

What is human capital management software?

While the most emphasis should be on hiring the right behaviours to create the culture you want, human capital management is still important to maintaining the employee experience after they are hired. And that’s where a variety of IT tools can help HR teams.

We have already introduced people analytics, but human resources systems can also cover compensation, benefits, talent management, training and development, workforce planning, work-life solutions, time tracking, and payroll.

How to improve human capital management

So how do you hire the culture you want?

First, you need to identify those behaviours that will form the culture, and then identify the people who have them. Getting this right requires precision, which is where data and technology are key.

Just as IT systems, resource planning and CRM have done in the past, people analytics is the next stage of technology to make business more efficient. It’s a way of enhancing human capital management by assessing and building a picture of the qualities and characteristics – desirable or not – of individuals in a team. 

Note that people analytics is a broad term for any kind of tools for modelling people, and their goals and uses vary. Some focus on experience and personality to inform managers on how to influence and incentivise their people to be more productive.

Others, (like ours) help companies pinpoint and effectively place a candidate for a role by assessing beliefs and behaviours to find those who naturally align with the values and culture of a business. 

In our experience, it’s much better to think about a person’s default setting rather than how well they will respond to being managed. 

What is leadership capital management?

As you might expect, leadership capital management is simply human capital management focused on your senior team. 

Leadership teams are the most important to get right. You need your elite players to set the behavioural standards of the company. If you don’t have the right people in leadership at the outset, their behaviours can form the culture you don’t want, cause dysfunction in the organisation and fail to achieve excellence. 

By assessing a leadership team, you can make sure the team is balanced enough so that their functional abilities and behaviours complement each other. Our people analytics tools build functional balance charts covering how strategic or tactical each leader is, and how much they create or measure value. For behaviour, a behavioural complementarity chart measures against the four PACE behaviours: Pragmatism, Agility, Curiosity and Execution.

Using people analytics to achieve an optimised and balanced team makeup, you ensure leadership sustainability by having the right leaders at every stage of the company’s development. Analysing your leadership teams annually will tell you if you have the right people this year, next year, or at any moment along the value creation plan. Something critical for private equity where high-growth portfolio companies only have a finite time to succeed.

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