Why Fines Backfire: Choo Ann NGOH on Shifting Client Behavior

In a recent LinkedIn post, Choo Ann NGOH discusses a common business pitfall: using penalties to correct undesirable client behavior, arguing that such tactics often exacerbate the problem. Drawing on insights from Freakonomics, NGOH explains how financial penalties can backfire by removing moral incentives and reframing desired actions as mere transactional costs.

NGOH highlights a famous daycare study mentioned in Steven Levitt and Stephen Dubner’s Freakonomics. Initially, parents felt guilty for picking up their children late. However, when the daycare center introduced a cash fine, the study found that late pick-ups actually doubled. NGOH elaborates on this phenomenon:

“Before the fine, parents felt guilty (a moral incentive). Once a price tag was attached, the guilt vanished. It became a transactional fee: For a few extra Ringgit, I can buy extra babysitting.”

The Pitfalls of Penalties in Professional Services

Applying this lesson to professional services, NGOH observes a similar pattern in accounting, audit, and B2B firms. Partners often resort to late fees when clients delay document submissions or ignore invoices. However, NGOH argues that this approach, rooted in information and incentive asymmetry, rarely achieves the desired outcome. Instead of fostering respect for the firm’s time, clients may simply rationalize the fee as an acceptable business expense, allowing them to operate on their own schedule.

According to NGOH, in the Malaysian professional ecosystem, where relationship capital is highly valued, transactional friction can be detrimental. The focus should be on preventing issues upfront rather than penalizing them after the fact. NGOH states:

“In Malaysia’s professional ecosystem, relationship always beats transactional friction.”

To effectively manage client behavior and ensure timely payments—moving from a 365-day cycle to a more manageable 30 days—NGOH proposes a proactive strategy focused on eliminating friction through digitalization and clear frameworks.

Shifting Client Behavior Proactively

NGOH outlines a framework with three key strategies to shift client behavior without resorting to punitive fines:

1. Social Proof Invoicing

This method leverages the power of peer influence. By highlighting the percentage of clients who settle their invoices early, firms can subtly encourage others to do the same, tapping into social norms rather than imposing penalties.

2. Operational Friction

NGOH suggests implementing automated ‘lock-outs’ for accounts that remain unpaid beyond a certain threshold, such as 45 days. This creates a natural, operational consequence that is integrated into the workflow, rather than an arbitrary penalty.

3. Tiered Off-Boarding

This strategy involves establishing clear boundaries and consequences within the initial onboarding Service Level Agreement (SLA). Instead of dynamic penalties, the off-boarding process is clearly defined, ensuring transparency and predictability for both parties.

NGOH concludes by posing critical questions to the business community:

“How do you handle chronic late-paying clients without fracturing the relationship capital? Which is more valuable for businesses? Relationships OR Transactions?”

These questions prompt a deeper reflection on the long-term value of client relationships versus the short-term gains or losses associated with transactional approaches and penalty systems.