Mr McCully has already made it clear in a letter to Mr Allen last week that the Government does not want savings made by wholesale outsourcing of jobs in foreign posts, one of the proposals.
He suggested that ditching outsourcing proposal would mean a high degree of dependence on heads of mission to manage the savings required.
Asked yesterday if that could amount to bulk-funding embassies, Mr McCully said: "I'm quite comfortable about moving down that path.
"That doesn't exclude heads of mission, for example, deciding in Europe that outsourcing arrangements are going to give them good economies. I know some of them would certainly opt for that.
"But it does take you much more down the path of giving heads of mission a budget."
He said that was something for Mr Allen to think about.
"But from the Government's point of view as purchaser, it is certainly an area where I feel comfortable about us saying that we would like to purchase a certain level of service from a particular location."
He said Mr Allen shared his view that heads of mission should have more responsibility and be more accountable.
Various negative responses to the restructuring, including a letter signed by almost all of the 53 ambassadors, have been leaked to Labour over several weeks.
More than 30 ambassadors are expected at the two-day meeting to discuss changes.
Mr McCully rejected a notion that he would have to repair damaged relationships at the meeting.
"Many of the concerns that have been expressed by diplomatic staff are addressed by the letter that I wrote to Mr Allen and people are therefore relieved that those proposals are not going to be pursued."
Asked if he would have conducted the change process any differently, Mr McCully said: "It's not for me to answer that question. It's entirely a matter for the chief executive as to how he carries out that process."
Labour's claim he had been "donkey-deep" in the change process was wrong. The State Sector Act placed limits on what he could do.
