Upon his retirement from playing, Walley became the youth coach at Watford in August 1977. In his early years, players such as Kenny Jackett progressed to the first team. Under his management, Watford won the FA Youth Cup in 1982. Players in that side included future England international John Barnes, future Watford captain, Player of the Season and one-club man Nigel Gibbs, and 1984 FA Cup Finalist Neil Price. They again reached the final in 1985. Walley was promoted to first-team coach in 1988 by manager Steve Harrison. When Harrison moved to Millwall in 1990, Walley joined him as a youth coach, and in his first full season Walley lifted the FA Youth Cup for the second time in 1991. Just as he did at Watford, he followed this with a second final three years later. Walley left Millwall to join Arsenal in 1996, serving under Bruce Rioch and Arsène Wenger. In 1996, he was appointed manager of the Wales under-21 team by Bobby Gould.