Human Capital Management
7 min read

Human Capital vs Human Resources

a visual of Human capital management versus human resource management
Written by
Paul Arnesen
Published on
August 16, 2023
Human Capital Management
Workforce Strategy

The workforce of an organisation plays a central role, encapsulating both human capital and human resources.

Human capital underscores the economic value of employees' skills and experiences, whilst Human Resources handles employee-related affairs.

Human Capital Management (HCM) seeks to maximise employee value, whereas Human Resource Management (HRM) centres on effective employee management processes.

Both elements are crucial, with the former representing an investment in talent and the latter ensuring its adept management.

Recognising and fostering each individual's potential is paramount.

Key takeaways

Definition and Focus:

  • Human Capital: Refers to the collective skills, knowledge, and experiences of employees, emphasising their economic value and potential contributions to an organisation.
  • Human Resources: Pertains to both the individuals working for a company and the department responsible for managing all employee-related matters.

Perspective:

  • Human Capital: Views employees as assets whose value can be enhanced through investments like training and education.
  • Human Resources: Focuses on the processes, systems, and policies related to managing and supporting the workforce.

Primary Objective:

  • Human Capital: Aims to maximise the inherent value and potential of each employee to benefit the organisation's bottom line.
  • Human Resources: Ensures effective management, recruitment, onboarding, and welfare of employees, facilitating their contributions to the organisation.

Strategic Approach:

  • Human Capital: Centres on long-term investments in employees, such as skill development, to ensure future organisational growth.
  • Human Resources: Emphasises immediate operational aspects like payroll, conflict resolution, and enforcing company policies.

connecteam ad
Connecteam is a great software for your business' HCM and HRM needs

Understanding the difference: human capital vs. human resources in modern business

An organisation's workforce is the most valuable asset in today's competitive business environment.

The skills, talents, and intellectual properties of an organisation's staff are the engine that drives its success.

Within this context, human resources and human capital concepts have evolved and are now integral parts of any organisation's strategic planning.

This article delves into these concepts, their definitions, roles, and how they coexist within an organisation's framework.

The focus is on understanding their differences and similarities and how the optimal utilisation of both can lead to organisational success.

Understanding Human Capital

Human capital refers to the collective skills, knowledge, and experience that employees possess within an organisation.

These attributes contribute to the organisation's overall value and are often viewed from a person-centred perspective.

This approach emphasises the importance individuals can bring to the organisation and what this value means for the organisation's bottom line.

Investopedia defines human capital as the economic value of a worker's experience and skills, which includes education, training, intelligence, skills, health, loyalty, and punctuality.

The human capital approach views the future value of employees as an investment the company can make, focusing on the person behind the resume rather than just their job function.

Defining Human Resources

The term Human Resources (HR) describes both the individuals who work for a company and the department responsible for managing all matters related to employees.

The Human Resources department oversees workforce acquisition, management, and optimisation. 

According to Investopedia, Human Resources refers to the pool of available human skills, knowledge, and expertise which can be drawn on when required.

This pool of resources needs to be managed effectively to optimise productivity, which is where the HR department comes in.

The roles that an HR team or manager would oversee include: 

  • Employee handbooks and manuals
  • Employee conflict resolution
  • Upper management
  • Onboarding
  • Payroll
  • Benefits administration
  • Paid time off and leave
  • Enforcing company policies
  • Contract violations

The Intersection of Human Capital and Human Resources  

Human Capital and Human Resources are not mutually exclusive; they coexist and complement each other within an organisation's structure.

The aim is to translate human resources into human capital and investment.

When an organisation's company culture and human resources are operationalised, it fosters a conducive work environment where employees feel safer, more engaged, and excited about their work.

Engaged employees are more efficient, thus contributing more significant value to the organisation.


todoist

The Importance of Role Alignment 

Role alignment matches employees' skills, knowledge, and expertise with the role that best utilises their strengths.

This process bridges the gap between human capital and human resources.

Role alignment is one of the critical factors in operationalising a human resource strategy.

It fosters a positive company culture and yields positive results.

When employees are aligned in their roles, the company's investment in them pays off, leading to a thriving workplace culture and overall company success.

Human Capital Management (HCM) vs Human Resource Management (HRM)

Human Capital Management (HCM) and Human Resource Management (HRM) are often interchangeable.

However, they represent two distinct approaches to managing employees within an organisation.

HCM refers to practices related to recruiting, hiring, developing, rewarding, and managing employees to bring out the best in everyone to help the organisation achieve its goals.

On the other hand, HRM focuses on developing and managing systems and processes that enable employees to perform their roles effectively.

It covers tasks such as recruiting and hiring new employees, onboarding, training, developing competitive compensation plans, handling disciplinary actions, and managing relationships among employees and between employees and the employer. 

Similarities and Differences Between HCM and HRM

HCM and HRM are people-centric, data-powered solutions that can help define and deploy new workforce strategies effectively.

However, there are some key distinctions between the two. 

HCM is about optimising the economic value that employees bring to an organisation.

It invests in employees through training, education, and enhanced benefits.

On the other hand, HRM is about managing the process of recruiting, hiring, and developing employees.

It focuses on creating a streamlined recruiting process that helps the company find the best people for open roles.

Human Capital and Economic Growth 

There is a strong relationship between human capital and economic growth.

Investing in human capital, such as providing opportunities for education and training, can lead to improved productivity and profitability, both for the individual organisation and the economy.

Governments recognise this relationship and often provide higher education at little or no cost, with the understanding that a more educated workforce will lead to increased economic growth. 

Human Capital vs Human Resources: A Historical Perspective

The idea of human capital can be traced back to the 18th century, with classical economist Adam Smith proposing that improving human capital through training and education leads to a more profitable enterprise. 

On the other hand, the concept of human resources is a more recent development, emerging in the 1960s.

It represents the evolution of the traditional personnel management function, emphasising the strategic management of the workforce.

The Future of Human Capital and Human Resources

In today's dynamic business environment, human capital and human resources concepts are continually evolving.

Organisations are increasingly recognising the value of their employees, not just as resources to be managed but as capital to be invested in.

This shift in mindset has significant implications for HR practices, with a greater focus on employee development, engagement, and well-being.

As companies navigate the complexities of the modern workplace, the strategic management of human capital and human resources will be critical to their success.

Conclusion 

Human resources and human capital are integral parts of any successful business strategy.

Understanding the differences and similarities between these two concepts can provide valuable insights for business leaders and HR professionals.

While human capital focuses on the value that individuals bring to an organisation, human resources is about managing the processes and systems that enable employees to contribute this value effectively.

Businesses can foster a more engaged, productive, and successful workforce by leveraging human capital and human resources.

Ultimately, the key to successful human capital and resource management lies in recognising each individual's unique strengths and potential within the organisation and creating an environment where these can be nurtured and utilised to their fullest potential.

Share this post
Human Capital
Human Resources
Employee Development
Workforce Strategy
Human Capital Strategist
Paul Arnesen
Human Capital Strategist
Learn About Cultures

The Working With Us podcast

Check out these 3 recommended episodes!

Working with Germans with Steffen Henkel
Germany

Working with Germans

Working with Germans with Steffen Henkel
Working with the Swedish with Christina Rundcrantz
Sweden

Working with the Swedish

Working with the Swedish with Christina Rundcrantz
Working with Norwegians with Karin Ellis.
Norway

Working with Norwegians

Working with Norwegians with Karin Ellis.

Subscribe to my newsletter

Stay up to date with the latest HR insights and strategies.

Paul smila