#ProductivityGap Costs UK SMEs £57bn a Year

 UK SMEs LOSE OUT ON £57bn A YEAR – 1.5x THE COST OF BREXIT – DUE TO PRODUCTIVITY GAP

• UK SMEs could add £57bn to the economy if they matched the productivity levels of German SMEs [i]
• Despite this, productivity falls to the bottom of key business priorities amid political and economic uncertainty
• NatWest research reveals workplace culture, employee benefits packages and rewards for good performance have the biggest impact on productivity
• NatWest launches a Productivity Blueprint, outlining the steps businesses can take to improve business performance

NatWest today unveils research, conducted by Cebr, which reveals UK SMEs could add up to £57 billion a year – more than the cost of Brexit [ii] – to the UK economy if they were as productive as SMEs in Germany. While businesses and government focus on the UK’s imminent departure from the EU, the research shows UK SME employees, on average, generate £147k worth of output per year – less than half that of their German counterparts (£335k per worker, per year). This productivity gap is under further pressure according to the latest ONS estimates, which identified a 0.5% fall in UK productivity in the first quarter of the year.

Despite this productivity gap, NatWest’s research found UK SMEs are uncertain about the actions they need to take to boost business productivity. Even though more than two-thirds (69%) of SME decision makers believe improving productivity is important, just over two-fifths (41%) don’t know what productivity means in practice, making it difficult for them to identify the steps to improve.

NatWest’s research, ‘Productivity in focus: Germany vs. the UK’, analysed the productivity of UK SMEs and those in Germany, the G7’s most productive economy, to identify potential changes UK firms can make to close the productivity gap. It found that a UK business with 10 employees could increase annual turnover by £1.9 million if they worked at the same productivity level as a German business, with this figure increasing to £4.7 million for businesses with 25 employees. [iii] Despite these potential gains, the research identified that Brexit and political uncertainty means tackling productivity falls to the bottom of a list of key business priorities [iv], and British SMEs are also less likely to set productivity improvement targets compared to their German counterparts (39% vs 52%).

To help UK SMEs understand how they can improve productivity, NatWest and Cebr identified the following measures with the biggest impact:

	UK potential productivity impact: Potential increase in output, per worker, per year [v]	Average percentage of UK businesses that have implemented
Investing in workplace culture. For example: team building exercises, mentorship or buddy schemes.	£55,500	32%
Benefits packages above statutory minimum. For example: offer of paid days leave above the legal minimum, subsidies for meals eaten at work.	£40,500	32%
Rewards for good performance (financial and non-financial). For example: commissions, bonuses, non-financial performance incentives for employees.	£19,200	26%

Investing in workplace culture, employee benefits packages and offering rewards for good performance were the measures most likely to have the greatest impact on improving productivity. Despite this, only a third (32%) of UK SMEs said that they invest in workplace culture and employee benefits above the statutory minimum, and just over a quarter (26%) offer rewards for good performance (both financial and non-financial), such as bonuses [vi].

By comparison, a much higher percentage of SMEs in Germany are already implementing two of the top three measures most likely to have the greatest impact on German SME productivity. But, as is the case in the UK, German SMEs would also see a significant benefit per employee (£42,400k) if they offered rewards for good performance.

	German potential productivity impact: Potential increase in output, per worker, per year	Average percentage of German businesses that have implemented
Rewards for good performance (financial and non-financial). For example: commissions, bonuses, non-financial performance incentives for employees.	£42,400	26%
Career development and guidance. For example: matching employees to the work they find interesting and best suited to their skills, internal knowledge and skill sharing sessions.	£34,900	44%
The right equipment or technology (IT/machinery). For example: investment in research and development of technology, equipment and technology relevant to the business.	£21,000	44%

To provide businesses with guidance on how to improve business performance and work towards closing the productivity gap, the bank has teamed up with beauty business mogul Sharmadean Reid to create a Productivity Blueprint, outlining the measures which have the biggest impact on productivity and including tips and advice from other successful small business leaders across the country.

Additionally, NatWest has made available £1 billion in additional lending aimed at SMEs looking to boost performance through investment in productivity-improving measures.

Alison Rose, Chief Executive of NatWest Commercial and Private Banking, said: “From talking to thousands of our business customers every year, we know that many small to mid-size businesses struggle to understand how best to improve productivity. That’s why we’ve commissioned this research to better understand the productivity landscape and source best practice in this area to share with our customers.

It’s crucial that banks, Government, and business leaders tackle this problem head-on, and start putting measures to improve productivity into practice. Our NatWest Productivity Blueprint, created in partnership with business leaders across the country, will help our customers identify what measures they can put in place to improve the productivity and performance of their business.”

Sharmadean Reid, founder of Wah Nails, said: “When I was starting my own business, I wanted advice from someone who had been there, done that and really understood my world. From my experience, I know that it can be hard to get the headspace to plan effectively for the future and think about how to tackle key business issues such as productivity. That’s why I’m partnering with NatWest to create this Productivity Blueprint to outline a series of simple steps that any small business owner can consider taking to help their business be the best that it can be.”

Further help can also be found on the NatWest Business Hub launched last month. The Hub provides insight on a wide range of topics, including cashflow, exporting, productivity, e-commerce and keeping safe from scams, to businesses of all sizes and sectors, through editorial articles, videos, podcasts and access to webinars and events.

£57bn was calculated using the latest Eurostat productivity data (2015), for SMEs. The difference in UK and German productivity was scaled up using the average number of workers per businesses, and Eurostat data for number of businesses by employee numbers.

YouGov were commissioned to survey over 2,000 UK SME decision makers between 3rd – 13th April 2018. At least 50 decision makers responded in each relevant sector and region and the figures have been weighted to be representative of British business size.

[i] With 10-259 workers

[ii] Chief of Government’s spending Watchdog, Sir Amyas Morse of the National Audit Office, sets the Brexit divorce bill at £39 billion. http://uk.businessinsider.com/brexit-uk-required-to-pay-39-billion-divorce-bill-even-without-deal-2018-4

[iii] Figures were calculated using survey results from Germany and the UK

[iv] Other business priorities were raising revenues, cutting costs, retaining employees, growing client base, improving customer satisfaction

[v] Average difference in annual productivity between businesses which have implemented policies and those which have not implemented the measures but have considered it

[vi] On average across the measures