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Atlanta Home Loan

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a) List the controls that Al Fiorini used to control his business both before and after he went back to school. Classify each control as a results, control, or personnel/cultural type of control.

Action control
Before he went back to school
i. Al monitored the activities of his loan officers by tracking the number of credit inquiries each requested. (Merchant, pg.23)

ii. Al closely monitored the loan application/lead ratio depending on the skill of the loan officer. (Merchant, pg.23)

iii. Al refused Wilbur’s request to have signing authority on company checks written against AHL’s main bank account. However, as a sign of good faith, he left 4 blank checks (only to be cashed with his permission) with Letitia, the office manager, whom Al trusted. (Merchant, pg. 24)

After he went back to school
i. Al was no longer managing the day to day operations of the company but continued to monitor AHL’s operations closely. Daily, or as soon as the information was available, Al tracked the employee head count, number of leads, credit inquiries, loan applications, funded expenses and bank activity. (Merchant, pg.25)

ii. Al was also on the phone 3-4 hours per day talking with employees, and, particularly, loan officers. He thought that this would allow him to monitor the employees’ emotional states, one that Al thought would be an important leading indicator of forthcoming company performance. (Merchant, pg.25)

iii. Al also had the company mail forwarded to his California address. (Merchant, pg. 25)

iv. Al also had been monitoring the activity in the Bank of America (BofA) account on the internet from Los Angeles. (Merchant, pg.25)

v. Al sent a fax and certified letter to Wilbur and Letitia and also spoke with them directly, ordering them not to write any more checks without his permission. Al also called BofA to stop payments on the 4 checks Wilbur wrote and asked the bank to transfer the funds from the general checking account to a side payroll account to which Wilbur would not have access. (Merchant, pg.25)

vi. Al sent in a friend to AHL office to fire all employees on his behalf but the employees refused to leave. He had also sent a letter to all AHL clients whose loans were in process that they company had to drop their applications due to “no longer being able to service your application”. (Merchant, pg. 26)
Result control
Before he went back to school
i. Al’s incentive structure in place was to give the telemarketers $10 performance bonus in addition to their hourly wage for each lead produced. (Merchant, pg 23)

ii.AHL paid the loan officers 40 % of the total loan revenue on loans that AHL originated, and 60% on loans the loan officers themselves originated by generating their own leads. (Merchant, pg.23)

iii. Al had agreed on the written partnership & licensing agreement that Wilbur would receive commission payments at 100% on all loans closed less a monthly licensing fee of $5000 or 10% of all revenue, whichever is greater. (Merchant, pg.24) ii. Were the problems described in the case caused by failures in the company’s strategy or control system, or both?
The problems described in the case were caused by failures in the company’s control system and not by its strategy. The company had a cost leadership strategy where it offered clients to borrow money at wholesale rates (Merchant, pg. 22), this was still AHL’s goals and objectives before and after the problems had occurred.
The series of problems at AHL after Al went back to school had resulted from poor management controls in place at AHL. Moreover, the agency problems that Al had experienced with both Joe and Wilbur, made the situation even worse. Al was no longer managing the day to day operations of the company yet continued to monitor AHL’s operations closely - daily, or as soon as the information was available. At this point, Al was only overseeing the operations of the business and fully entrusted its best interests to Wilbur. He gave full control to Wilbur without limiting his authority on certain aspects of the business. This arrangement not only gave the perception to AHL employees that Wilbur is now in charge, combined with the absence of tighter controls, had caused a negative chain of events to occur that led to Wilbur’s takeover of AHL. iii. What did Al do wrong? Include a discussion of the effectiveness of the controls that Al implemented.
Al did not seem to have done a thorough background check on Wilbur prior to reaching a formal partnership agreement. There was no mention of Al doing a reference check on Wilbur to confirm his accomplishments and/or past performance. Al made the quick judgement of putting Wilbur in charge on the basis of that “he was smooth”. Perhaps receiving an objective feedback from Wilbur’s previous employments would have allowed Al to make a well-informed decision regarding the partnership.
Based on the controls in place and listed above, Al did not seem to have taken a hands-on approach in managing AHL. Most of the action control activities he had set in place were about monitoring the employees’ activities, his action controls did not seem to include corrective actions for those that would display undesirable behaviours, and there was also no follow up process or an action reinforcement in place to see if any corrective actions implemented were effective. Basically, there were no behavioral constraints in place to curb goal incongruency, and to minimize the agency problems.
This seems to be the case when Wilbur and Letitia colluded with each other in cashing Al’s blank checks and Al only sent them a letter and after speaking with them ordering them not to write any more checks. The action proves to be ineffective as it further worsen the situation when Wilbur committed more undesirable actions that would ultimately lead to AHL’s takeover.
This also displayed poor administrative controls, where Al did not keep the blank checks in a locked up safe instead of giving them to Letitia. There was also no segregation of duties where he should have given Letitia the password to open up the safe when deemed necessary instead of giving her the actual checks where there could be a high likelihood of fraud.
Al’s results controls also proved ineffective, Wilbur’s commission payments at 100% of all loans closed or 10% of the revenue seems to be lacking a direct link to Wilbur’s performance measurement. There doesn’t seem to be a clear relation to how Wilbur’s performance in hiring new loan officers, paying the expenses of running the office, and managing the staff would merit him receiving 100% commission payments on another loan’s officers efforts in closing a loan. If the loan officers have been made aware of this, they may perceive it as Al being bias in not providing equal rewards to his employees. In addition, there was also no mention of an incentive structure for Letitia. Although, she had displayed her loyalty to Al in bad times, there is no incentive for her to perform better or worse. This encouraged behavioural displacement on her part when she helped Wilbur to take over AHL.
Overall, due to the absence of tight controls in AHL, it resulted into insubordination of Al’s employees, increased agency costs caused by Wilbur, and lose of goodwill from AHL clients affected during this corporate takeover.
b. Generate alternatives and select decision criteria
i. Consider that Al wants to learn from this mistake, and remember the last statement in the case: What might he have done to prevent this disaster from happening?
If we would have gone back to the original options Al had, actions he could have done to prevent this disaster from happening are as follows:
- If Al concentrated on selling the business first and perhaps waited to enroll for the September 2002 fall semester, he could have focused on his studies and completed it successfully. At that point, he would have probably had the option to found another mortgage lending company using the proceeds from selling AHL and built it with the knowledge and skills he acquired from his studies.
- Although shutting down the business would have prevented this disaster from happening, it would not have been a viable option as Al would have lose a value of $600,000 placed on his business.
The following alternatives are based on the current situation.
1. Al will need to consider deferring his studies for a short while and go back to Atlanta, in order to take on a more hands on approach in implementing tighter controls when he goes away again for his studies.
2. Pursue legal action against Wilbur to recover damages, and order to return ownership rights of AHL to Al.

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