Interesting thread so far.
There's an article the 1997 F1 yearbook by Nigel Roebuck which I'm going to quote from. Might give some insight of what was felt at the time.
"The Williams decision to replace Hill with Frentzen seemed eccentric, to say the least, and stemmed from the proprietors fears that Ferrari would ultimately provide Schumacher with a truly competitive car. "If you really want to know why we're replacing Hill," another [Williams] team member tersely said at the time, "It's because he can't bloody pass people."
"That seemed a touch harsh, for overtaking in the contemporary era is near impossible at the best of times, but it was indisputable that getting though backmarkers quickly - a Schumacher speciality - was not Hill's strongest suit. [Frank] Williams suspected in that, in Frentzen, he would have not only an ultra quick driver, but also a harder racer than Hill.
"There is, however, rather more to being a successful driver than that. Gerhard Berger was astonished by Williams decision: "First, Frentzen is not exactly proven. Second, while Damon may not be the most naturally-talented driver, he knows how to win races - and that's something you can't teach. You have it, or you don't."
"Williams had something else going with Hill, too. There is probably no better test driver than Damon, and those skills would be missed. Broadly, his tastes in set-up followed conventional Formula 1 practice, whereas Villeneuve, schooled in Indycar racing, had more radical ideas, which sometimes worked, sometimes didn't."
From later in the article:
"Again, thoughts turned back to Hill, formerly the Williams baseline - and a man who had easily won the German Grand Prix the previous year. By now, members of the team were freely conceding (off the record, of course) that his removal had been a mistake, a view further amplified by events in Hungary, where Villeneuve won - but only after passing Damon's stricken Arrows on the very last lap."
While I think Roebuck is a bit generous about the German GP in 1996 (Berger was leading and his engine blew with 3 or so laps to go) I think he summed up the situation quite well.
In my mind, Williams would have been a formidable pairing in 1997 had Hill remained. They wouldn't have made the stupid mistakes they did in places like Monaco. I'd say it would have been Hill's tortoise to Villeneuve's hare, with Schumacher providing a much greater threat than in 1996. A 3 way title fight might have been possible, and the kind of year where even if Damon had been 3rd at the end, it would probably have been after a few great wins and just a few points down. Maybe he would have finally got that Monaco win, or a less controversial win at Silverstone.