In 1989, Kelly was forced to retire aged just 24 after sustaining a back injury, and initially took the job of youth team coach at Wolverhampton Wanderers.
This followed wins over relegation rivals Hull City and Millwall, as well as victory against Luton Town and a creditable draw against Premiership-bound Reading.
On 11 April 2007 Kelly was sacked due to a poor run of results, his final game being a 3–0 defeat away to Plymouth Argyle.
Kelly acted as caretaker manager following the departure of Alan Irvine in December 2009, a 7–0 FA Cup win over Colchester being his only game in charge.
After Irvine left the Owls in February 2011,[4] Kelly also departed after Gary Megson was appointed as manager and made changes to the coaching staff.
[11] In December 2015, Kelly agreed to become first team coach and link up again with Alan Irvine alongside Paul Lambert at Blackburn Rovers.
[13] Following the sacking of Dunn on 13 December, he was appointed as caretaker manager,[14] leading the club to victories over Cheltenham Town and Port Vale.
[16] On 21 February 2021, Barrow parted company with Jolley and Kelly was once again named as caretaker manager, this time until the end of the season.
[17] During his second stint as caretaker manager, he presided over an upturn of form and on 27 April, with two matches remaining, Barrow secured their Football League status for the following season with a 2–0 win at Forest Green Rovers.
[21] On 18 July 2023, Kelly joined Preston North End as a first team coach, returning to the club and reuniting with manager Ryan Lowe, who he worked with previously at Bury.