Generally, Editors and Art Directors act as intermediaries between the author and the illustrator. If you are working with a dedicated publisher, then you are probably in good hands. They have a vested interest in pairing you off with the illustrator that is best suited for your work. Trust their judgment or include them in your selection process.
If you have a good idea of the illustrations that you want to accompany your manuscript or if you feel your manuscript will stand out more with illustrations, working directly with an illustrator is a great way to package your product.
In the case of On-Demand publishing, it’s a whole different story. The illustration selection process on their end is based on finding the very cheapest illustrator to work into the package deals they offer. You are often given a few styles to chose from but there is very little incentive for the illustrator to amaze you since they are often treated as nameless service providers.
When self-publishing, dealing directly with an experienced illustrator is by far the best option. You will find their prices competitive, since you are cutting out the middle man, and you will find that including the artist in the creative process serves the same function as an experienced in-house Art Director.
Taking pride in one’s work is something that is hard to qualify but it’s something that creative types live by. Imagine yourself writing a weekly article for a magazine on the other side of the country from where you live. If all that is expected of you is to cover a certain topic, without ever receiving feedback from the readers wouldn’t you feel a little disconnected? Would you not be more emotionally invested in putting forth that extra effort to impress if you had a connection with the audience. The sense of pride that comes from getting personal feedback from your audience is an invaluable impetus to the creative process.