Unfortunately his playing days were then cut short by a serious back injury. After training as a journalist in the Black Country, Kelly began coaching at Wolverhampton Wanderers’ School of Excellence before moving on to coach at Watford and Blackburn Rovers.
Craig Levein appointed him as his assistant manager at Leicester City in November 2004 and, when the Scot was sacked in January 2006, Kelly was named as manager for the rest of the season, assisted by Mike Stowell.
Leicester were in the bottom three of the Championship when Kelly took over and in real danger of relegation to League 1.
His first game in charge was a defeat at home in the FA Cup by Southampton, but he won his first three league games, defeating Queens Park Rangers away, Wolverhampton Wanderers at home and Brighton and Hove Albion away.
This took Leicester City to 19th position. He then won three and drew one of the four games in March, winning the Manager of the Month award in the process.
Following a 2-0 victory over Crystal Palace on Good Friday, Kelly was rewarded with the full time manager’s post. Leicester City finished the season in 16th place. In his 16 matches in charge he had accumulated 28 points.
When he took over the manager’s role, the Club had only gained two points from the previous 10 games and had lost the last six of these in succession.
The turnaround was remarkable. During the 2006 close season, Kelly added Gareth McAuley, Andy Johnson, Josh Low and Darren Kenton to the squad, but by mid-September the Club was once again in the relegation zone.
In November 2006 the board accepted Milan Mandarić's bid to take over the Club.
The takeover was completed by February 2007, when Mandarić was introduced to the crowd as the new owner, but the transfer window had closed so Kelly couldn’t strengthen his squad.
He had to make do with loan signings Mark Yeates, Geoff Horsefield, Jason Jarrett and Shaun Newton.
There was a slight improvement in February when Leicester City won three games in succession against Ipswich Town, Coventry City and Burnley, but then the team only managed four points out of the next 30.
Following a 3-0 defeat at Plymouth, Kelly left Leicester City and Mandarić brought in Nigel Worthington for the final five games of the season.
Leicester City finished the season in 19th position, and ironically the 47 points accumulated by Kelly before his dismissal would still have avoided relegation to the third tier.
Since leaving Leicester City, Kelly has worked as a coach or caretaker manager at Preston North End, Sheffield Wednesday, Nottingham Forest, West Bromwich Albion, Leeds United, Blackburn Rovers, Fleetwood Town and Bury.
He was later assistant coach to Uwe Rösler, at Malmo FF, in the Swedish top flight Allsvenska before following Rösler and joining Fortuna Düsseldorf on 7 February, 2020. He is now assistant manager at Sky Bet League 2 side Barrow.