The human factor was the distillation of the essence of what distinguished humans from other species (primarily Daleks).
The Daleks recruited the Second Doctor, against his will, to isolate and identify the human factor, using Jamie McCrimmon as a test subject. The Daleks claimed that they wished to distill the most important qualities from the factor and use it to make themselves more deadly. The Daleks, in fact, planned all along to use the Doctor's work to identify the Dalek factor. (TV: The Evil of the Daleks)
Once the human factor was identified, it was experimentally transferred to test Daleks, creating three humanised Daleks. The Doctor gave them the names Alpha, Beta, and Omega. He later sabotaged a Dalek machine so that it instilled the human Factor into any Dalek that passed through it, converting them into humanised Daleks as well. (TV: The Evil of the Daleks)
The human factor was later used to create a whole colony of Daleks on the planet Kyrol. (COMIC: Children of the Revolution)