Hiring a friend/relative/ family member generally brings these issues, but don't lose heart as at least this guy is performing in terms of work. I have seen cases where the relatives doesn't even work and still tries to be the boss.
Coming to your problem now, as he is a good friend, speak to him and share all the concerns mentioned above. Start your conversation with positives and then gradually move to discipline, punctuality and other things where he is a problem. State clearly what the role demands and looking into such qualities and skills you hired him, put in clear terms what your expectations are, set a target date to bring changes in his behavior, if he fails I'm afraid you have to tell him to discontinue.
Second solution could be to involve a third person in the scenario, any of your partners, who can give feedback to him and set expectations clearly. Involving some one else can actually save you from hampering your personal relationship with him. This third person can share all the problem areas and then provide solutions to him as well.
Some fault is your too, that you did not put a stop to some of his actions during his initial days. we don't give authority to read our personal letters to family members also, he is just a friend dear. He is taking advantage of being your friend, before hiring we should clearly state the limits to these people.
Let's hear what other members have to contribute, then we can surely come to a solution.
19th April 2011 From India, Delhi
I second to Ms. Archna and i request you to kindly try your best to solve your issues by applying logic and common sense. I am sure you will succeed in your mission.
You need to remain cooooool and think positive all time. Every problem has a solution and consider problem as a challenge, opportunity or obstacle to overcome.
You can do it as you are capable of doing it...
With profound regards
19th April 2011 From India, Chennai
Thanks Archna Mam. Thanks to you all for suggestions.
25th April 2011 From India, Surat