Defining HCM: Is it About “Real Value Added” or “Metrics and Tools?”

Article main image
Feb 19, 2014

The term “human capital” refers to the knowledge, skills, and abilities (KSA’s) of people within an organization.

For the most part, business professionals and organizations have readily accepted this definition.

Business people often refer to “human capital” in reference to the people of an organization, and today it’s commonplace for “human capital” to be interchanged with other phrases such as “workforce” or “employees.”

However, when it comes to the term “human capital management,” there’s much less of a common understanding and agreement of its definition. It is because of this that the phrase “human capital management” remains a misunderstood and under appreciated discipline today.

3 points of view on HCM

Based on my own research and knowledge of the subject, there are typically three points of view regarding the meaning of “human capital management.”

The first is that “human capital management” has to do with measuring the output of the collective human capital of an organization. Proponents who support this description immediately think of metrics like “Revenue Per Employee” or “Labor Costs as a Percentage of Profits.”

There’s even an official “Human Capital Return-on-Investment” calculation that takes “Revenue minus Expenses minus Labor dollars, divided by Labor dollars.” Of course there is more value in tracking the trend of this type of calculation than there is in considering the raw score of the calculation itself.

The second view of “human capital management” was created and developed by those who provide Enterprise Resource Planning systems and application programs and tools for automated HR Software and system giants such as Oracle and SAP.

They’ve built interactive suites of programs for tracking and managing data associated with people within an organization. A great example of this is Success Factors, a company owned by SAP, who touts its human capital management application suite as offering tools for performance management, applicant tracking, and succession planning, to name a few.

Oracle has consistently advertised its Oracle Fusion HCM software suite of programs in HR Magazine, and recently the company held its “Oracle HCM World” in Las Vegas hyping it as the “intersection of human resources, talent management and technology.”

More than metrics or software

With such large companies continuously marketing and selling HCM software solutions, it’s no surprise that the acronym “HCM” has caught on with many in the HR community.

But there are those of us in the third category that believe “human capital management” is much more than human capital metrics or software tools to help manage people data.

There is a growing community of senior level practitioners who view “Human Capital Management” (yes capitalized) as an organizational practice where value is created by investing in the collective human capital of the organization. This contingent includes proponents who understand the value of “engaging” our employees as part of the business strategy.

Statistics from a number of surveys support the concept that employers who engage their workforce perform at a higher level than those who don’t focus on engagement techniques. And there are a select few, including myself, who believe that Human Capital Management is the next step in the evolution of human resources as a functional discipline.

We believe that Human Capital Management operates across the organization and is comprehensive in nature, providing HR with a golden opportunity to take a leadership role in driving company-wide human capital initiatives.

A struggle to contemplate people in financial terms

It shouldn’t be a surprise that opinions regarding the true meaning of “human capital management” are most often aligned according to one’s stake in the game.

Recently, I met an Oracle sales person who couldn’t quite comprehend the notion that HCM might be something other than a software application for HR. When I relayed my view of HCM as “an organizational practice by which the human capital assets of an organization are collectively leveraged to gain a competitive advantage,” he looked at me blankly and replied, “So what software tools do you sell?”

I didn’t have the patience or energy that particular day to explain further. Perhaps I should’ve suggested he look up the term in the Society of Human Resource Management’s (SHRM’s) Glossary of Definitions. He would have found that SHRM’s definition for “human capital management” is the one highlighted in the previous paragraph.

One reason Human Capital Management hasn’t generated as much traction as it should is that HR purists have a difficult time contemplating people in financial terms. They are offended when it is suggested that people be utilized as a tangible asset just like machinery or money.

Others hold on to the “HR” moniker as if moving to a higher ground called Human Capital Management will make them and their jobs obsolete. It may be that it’s more comfortable for them to stay within the confines of HR as a “support” function to the rest of the organization.

The HR dilemma: looking out for people, or the organization?

And then there are the HR professionals who prefer to maintain the view that the human resources profession is as much about looking out for the interests of the people of an organization as it is about looking out for the interests of the company. They sometimes see themselves as the referee between the employee and the manager or company, with the self-imposed role of “employee protector.”

In some organizations, HR professionals sometimes even see themselves as employee advocates. These people struggle with the notion that businesses are in the game to make money, and not simply to employ people.

This isn’t to suggest that people shouldn’t be treated well, and in the spirit of the Golden Rule. But it is not HR’s role to be an employee advocate. That role is the responsibility of the direct manager, and HR should be supportive and step in when treatment of an employee is inconsistent with the best interests of the company or when the employee is not being managed as an important and useful resource of the company.

Another reason why Human Capital Management hasn’t taken off as an organizational practice is because up to now, there hasn’t been a road map to follow in order to achieve Human Capital Management. The majority of books and advocates of Human Capital Management have pushed “measurement” as the means by which HR can add more tangible value.

The fact is, no matter how many measurements and metrics an HR organization tracks, these metrics by themselves don’t add value. Certainly one can learn a great deal by using metrics, and HR professionals should continue to improve in working with workforce analytics and ROI measurements.

HCM: maximizing human capital for competitive advantage

But this is not the path to a greater role for HR. No doubt, there is an important role for metrics and measurement tools, but they are secondary to accomplishing work that is meaningful and value added.

For this reason, I refer to HCm, with a small “m” to acknowledge “measurement,” but also to separate the importance between the “management of people” and “measurement of data.” As I said earlier, metrics don’t add value; rather they are a tool to be used for improvement.

And let’s not forget about the software applications and related tools that are used to manage HR data. Let’s call them what they are: Human Capital Data Management. These software systems manage data, not people. People manage people.

The path to adding a higher-level value for HR is through playing an organizational, cross-functional role in leading and driving “human capital initiatives.” For this reason, I refer to HCM with each letter capitalized to underscore the belief that this is an organizational practice that maximizes human capital for a competitive advantage.

At the end of the day, it’s the value that HR brings in not only supporting other functions, but in leading strategic organizational initiatives that will enable the function to maximize the role it can play in making organizational contributions.