And contractors will "get things done", as they know they generally won't be kept around unless they are adding value.
That's the idea but that's not the reality. There's two types of contractors - those that have a very strong skillset and can get things done quickly, and the second type which basically can't hold down a permie job. In my 25 years experience, the latter vastly outnumber the former.
Those with the skillset are usually extremely good to work with and would be able to command even higher rates were it not for the latter type soaking up so much cash.
Oh, and when business slows down you don't have to think about redundancy payments, you just shrink your contractor workforce. No hard feelings, and thanks for all the fish.
Not very likely in finance. What we do is cut rates by 10% thereby keeping all the output but trimming the input costs. There's an exceptions list usually for each managers best contractors, but you can only put one or two names on it so you have to be choosy.