Human Capital Management: Strategy, Talent, and Performance

Introduction

Human Capital Management (HCM), sometimes referred to as human resources management, is "the strategic and coherent approach to the management of an organization's most valued assets — the people working there who individually and collectively contribute to the achievement of the objectives of the business."

In recent decades, this type of management has become a segment to which business leaders tend to devote more and more attention. One of the main reasons for this is the fact that the human capital of any organization has become the most effective instrument for gaining a competitive advantage over other organizations in the market. Training people, employing good personnel, and being able to motivate them are all necessary requirements to ensure that the organization performs well.

Often, it is through relatively modest investments in human capital management — rather than larger investments in infrastructure or total assets — that a company gains a stronger market profile compared to its competitors. At the same time, human capital encompasses everything from individual creativity to knowledge and know-how, all of which are assets in their own right with the capacity to create organizational advantage in the marketplace.

The New Human Capital Management Paradigm

The second half of the 20th century and the early 21st century gave rise to a global economy that was far more interconnected, dynamic, and volatile than at any previous point in history. This meant that the entire organizational framework supporting a company's business activities needed to change to match these new dynamics. One of the first changes was the introduction of a new human capital management model — one that would incorporate these emerging realities.

The first and most important change was the shift in perspective on human resources. In the past, there tended to be a bottom-up approach, where the human resource perspective was established before organizational objectives were determined. Human resources were also frequently regarded as a separate module, disconnected from other departments within the organization.

Today, this can no longer be the case. Increased competition and communication, along with other factors, no longer permit it. Two significant changes have taken place. First, human resources and human capital are now subordinated to the strategic, tactical, and operational objectives of the organization. The bottom-up approach has transformed into a top-down vision: objectives are established at the leadership level, and human capital must be engaged in achieving them.

The second important change is the far greater interconnectivity between human resources and the other departments in an organization. Human capital can no longer function in isolation; it is closely integrated with all other organizational activities. The increased necessity of interdependence across different branches of the organizational structure has driven the further integration of the human resources department with other functional areas.

Strategic Human Capital Management

The complexity of challenges in the current business environment, combined with the inherent complexity of human capital management itself, has led to the constant development of new HCM models. One such model was developed by the U.S. Government Accountability Office (GAO). It is worth examining not only because it is among the most comprehensive frameworks available, but also because it demonstrates that human capital management is a necessity in any organization — not only in those whose primary objective is profit maximization.

The GAO model identifies four cornerstones of strategic human capital management: leadership; strategic human capital planning; acquiring, developing, and retaining talent; and results-oriented organizational cultures. The second and third cornerstones most directly reflect what strategic human capital management entails.

Strategic human capital planning refers to a proactive rather than reactive approach to human capital. Rather than filling positions only when vacancies become urgent, strategic human capital planning requires organizations to examine their strategic objectives and plan human capital development according to those benchmarks.

Such a proactive approach offers several important advantages. First, it lowers costs, because it is less expensive to plan ahead and commit to recruitment and selection in a timely manner than to scramble to fill positions under time pressure. Second, the development of human capital becomes directly correlated with the objectives of the organization — an essential element of effective HCM.

The third cornerstone — acquiring, developing, and retaining talent — is arguably the most important phase of the human capital management process. Human capital and talent can effectively be treated as synonyms; the goal of managing human capital is therefore reflected in an organization's capacity to gather and manage talent. Acquiring talent is the result of a lengthy process of recruitment and selection. Both are interconnected: the organization must sort through initial candidates for a position (a process itself shaped by strategic human capital planning) and subsequently determine which recruited individuals will best fit the organization.

The management of talent begins once a recruited individual has been incorporated into the organization. The performance of each employee must be continuously monitored through a consistent feedback and control mechanism — one that requires a solid measurement framework, discussed in a subsequent section. Leadership must define benchmarks indicating the ranges within which an individual is performing satisfactorily and identify where performance and productivity can be improved.

Improving the performance of human capital typically requires motivation, training, or both. Training is essential for improving the technical capabilities and skills of employees. Challenges exist here as well. First, one must correctly identify the areas in which an employee needs development — whether those are areas of underperformance or areas required for future career advancement. Second, some capabilities, such as social skills, cannot always be taught through training, despite their importance. Third, there is always a risk that a trained employee may relocate to another organization, rendering the training investment a loss for the organization that provided it.

Motivation is another critical component of the performance-improvement process. In many situations, training itself functions as a motivational tool, but numerous other motivational practices exist — financial incentives being among the most common. Knowing how to properly motivate human capital often translates directly into better performance. In some organizations, for example, financial compensation alone is insufficient, and employees place greater emphasis on the quality of the social environment at work. In such cases, motivational instruments must be targeted accordingly.