Giving him permission to talk to other teams and then continuing to work with him would be kind of awkward, it would seem.
It's better for Detroit to get this out of the way now than in July or whenever his contract is out. The sooner Babcock decides his future the sooner the Wings as an organization can move on with or without him. Holland needs to know as soon as possible so he can secure a new coach and then make some moves to start building a team that will work best under whoever the coach is.