Bellagio Case - Owais Rafiq

Bellagio Case Analysis Management control systems Review and Recommendations

By: Owais Rafiq November 21st, 2011

Bellagio Casino Resort Analysis

Owais Rafiq

Executive Summary Bellagio has over $20 billion dollars of assets, 66,000 employees and made over $6M in profit the previous year (2005). In short, it is a large business, with operations in gaming, entertainment, food and beverage and hotel rooms. With such scale, a key responsibility of management is to maintain assets and ensure good cash flow – as much of its business is cash intensive. It is a highly seasonal business and competitive, with most of its operations in Las Vegas the hub of gaming (See exhibit 1).

Employee training, retention and controls are a key aspect of management policy as there are so many points of interaction with the end customers. This is supported with layered and substantive management controls, however, as stated in Merchant and Van der Stede “adding more control does not always lead to better control”. It is unclear if this is an optimal control situation, as there would is likely a high cost in having such controls with no clear tracking of results.

Management’s principal goal in the controls systems has been to negate or minimize gaming losses. There is an understanding that bottom-line numbers are not the only factor for; a trade off with customer relations is required. However, as seen below even with the multiple levels controls, there are still areas for improvement.

In general, Bellagio has all four principal forms of management control systems, with varying degrees of success, below is a summary followed by a more detailed analysis of each; •

Results controls – primarily through compensation systems (rewards).

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Action controls - which aims to prevent undesirable behaviours is done through various direct supervisory and physical controls

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Personnel controls – All three steps of the personnel control process are undertaken by Bellagio 1. Select and place the right employees through diligent recruiting and checks 2. Training sufficiently in both the technical and control aspects 3. Designing the jobs so as controls are built-in or mandatory undertaking for employees.

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Cultural controls – are primarily driven by the management’s mantra of tough on theft and cheating as well as fulfilling all Nevada Gaming Control Board (GCB) requirements.

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Bellagio Casino Resort Analysis

Owais Rafiq

Controls Analysis Results Controls As described above a key method of results based control is through compensation and rewards that properly align the company’s objectives, in this case, high customer service and accurate financial transacting. •

From the dealers end this is done through a low Base Salary for Bellagio dealers and tokes or tips from satisfied customers are primarily used as a compensation system. The better the dealer works the more tips he get. In addition, they are given a bonus holiday for perfect attendance, aligning to the goal of having consistent and the best individuals available.

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The management earn bonuses based on the financial profitability of the Casino area and a set of individual performance objectives. The three key indicators that Bellagio uses to measure the results are 1. the drop (the total amount of cash customers have bet) 2. the win (gross profit number) 3. the hold (percentage) primary measure of casino profitability. The variance reports which are a measure of action control on these worksheets are discussed below.

Action Controls Action controls are a more supervisory role and following from the above, the monitoring of ‘results’ was done primarily through the Master Game Worksheet which can show any large issues with false drops (chips at tables on credit), because they can’t get a ‘handle’ of total value of wagers made at the black jack table (exhibit 11). Thus the best indicator of profitability was hold percentages between 1822% however floor people were NOT always assigned to the same tables, so management did not have information to tie them to hold percentages and thus evoke the right behaviours. In addition, management would complete preaction reviews through auditing cycles. Physical Controls (or Limitations)

Bellagio maintained stringent controls on the recording of all receipts and disbursements. In the casino, these cash controls included: •

Locked cash boxes, secured cart transportation and daily cash and coin counts performed by employees who were independent of casino operations

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Constant observation and supervision of the gaming area by closed-circuit television

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Constant computer monitoring of slot machines

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Bellagio Casino Resort Analysis

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Owais Rafiq

Strict control of credit and count rooms at least three members and use of master games worksheet

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Held employees personally accountable for any shortage

Action accountability was derived from the timely analysis of deviations from expected performance and strict controls over issuing credit/limits including documentation controls. Personnel Controls Although there are many personnel such as floor supervisors, pit bosses, managers, most of the personnel controls are centered at the key control point of customer interaction, which is at the dealers. Thus the three steps described above are necessary to ensure the greatest level of personnel controls. 1. Selection and recruiting of experienced dealers who have both customer service skills and technical aspects of dealing mastered. This would include licensing by the Gambling Commission Board (GCB) 2. Training and experience are valuable in the ability of dealers to play quickly and identify cheating 3. In addition to the licensing requirement, there is a clear separation of duties from the dealers and the various levels of management. Dealers have standardization of actions at the tables and must count chips in public view (in view of cameras).

Furthermore, dealing is recognized as mentally taxing so relief dealers are summoned every hour. This creates a level of redundancy that also helps in the overall control. These personnel controls are evaluated at least once every 1.5 years via ‘mystery shoppers’ who test the skill of dealers. And if needed dealers are retrained or counselled accordingly. In addition, the personnel first mentioned; floor supervisors, pit bosses, managers, are all layers of control to ensure each level is doing their job function in the correct manner. Supervision and surveillance also creates some redundancy to reinforce the various controls. Cultural Controls

Bellagio’s culture is dominated by theft/cheating minimization and fulfillment of the laws. Bellagio is subject to various government laws and regulations. These include restrictions on employees, currency transactions, taxation and customer interaction. Multiple forms of control were required by the GCB and used in the Bellagio to help ensure that the casino reported what was needed. One such control is oversight of cash transactions of over $10k – this can be difficult when dealing with multiple tables and

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Bellagio Casino Resort Analysis

Owais Rafiq

machines, however, Bellagio through a series of Action and Personnel controls and meshing with the cultural control has put in place a system of oversight.

Much of the personnel control is reinforced by this culture of minimization and regulatory fulfillment. Thus standardization of actions, supervision, monitoring of results and strict and frequent auditing procedures (any missing documentation is retrieved within 24 hours) is all a part of this culture. However, the internal audit team consisted of only 63 persons out of the total workforce of 65,000 that’s less than .01% of the workforce and means each audit personnel is responsible for over a 1000 employees.

Summary of Risks and Issues Identified Based on my assessment of the management control systems used by the Bellagio Casino Resort, it illustrates a control system that is dominated by action and personal controls, rather than result controls. An analysis of this system reveals some insights of some of the factors that limit the practicality of result controls.
Following from above, there is a risk of lack of audit. Although a good control system, without the right checks and reassurances, there could be too much or too little control at various stages of the process map. Thus, tightness of control needs to be managed in order to have effective and efficient control systems.
Also, there is a risk of chips being given on credit at the tables and not aligning with the games work sheet and the cash drop variance report. There is no formal way to verify - checks are based on an estimated drop if it was out of line by +/-10% the shift manager or VP would follow up but it could be due to a customer on a ‘hot-streak’, thus not a reliable follow up procedure
There is an issue of ‘controllability’ as per the casino controller, Trent Walker there is not a good understanding of the tables ‘as it happens’.
There is a high onus on employees, being held personally responsible for out of cash balances and other issues, which could create a culture of negativity towards management rather than control centric actions
Management who are given bonuses on profitability do not have direct control of many of the factors mitigating these figures.
Cultural controls are predicated on licenses rather than internally

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Bellagio Casino Resort Analysis

Owais Rafiq

Recommendation The first recommendation to Bellagio would be to have a clear management control strategy that can be articulated to all employees. This should help create a more cohesive culture that currently uses only the GCB rules as a guideline. Internal code of conduct/ethics, check-lists and process maps should be developed and standardized or if already so, should be shared across the division. Also, looking to both competitors and other industries for best practices could be a good source of new knowledge, for example, banks method of cash handling, securing and transferring. Tightening relationship with IRS and GCB could create a cohesive and iterative audit process rather than one which infers constant oversight through strict regulation. Thus, perhaps an ‘in-house’ office for both regulatory officers as well as an internal audit representative would be a good addition. Tightness of incentives and clearer performance measurements are needed in order for results and action controls to be successful. Management should also consider new result controls which would include bonuses to various levels of employees (not just management) that tie directly to MCS goals and results. This could help defeat any motivation towards collusion, further separating or dividing personnel by encouraging ‘good’ behaviour. Some action controls immediately applicable could be done via automation. Much of the tracking currently (both master and variance worksheets) are completed manually. As discussed by VP Bill Bingham RFID technology in Chips may help in getting better statistics of players, win ratios and control bad chips. In addition, perhaps along with sensors at the tables and other points it could give real time data on a variety of other analytical profitability measurements as well as control functions. However, any such change must be balanced with customer enjoyment experience which could be hindered by such heavy handed intrusion of privacy – which could include infringement of privacy laws. Further physical controls such as retina and finger print scanning for employees could be initiated, however, this should be predicated by a cultural and group reward program so as employees do not feel embattled with management. Currently Bellagio is moving to digitizing recordings – they might also look to add automation in the camera supervision - a computer system that looks for out of sync movements or actions and alerts human supervisors to investigate. Thus, saving the human surveillance of tape just to those that are suspicious activities. Lastly, as revenues continue to shift from casinos, Bellagio must ensure proper controls are put in place in all other aspects of the business also, a new position, Senior VP of Management Control Systems is recommended.

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