Grayson moved into coaching in the 2004–05 season, managing the reserve squad at Bloomfield Road with some success. He was named caretaker manager of the first team in November 2005, following the departure of Colin Hendry. After diverting Blackpool away from relegation that season he was given the job on a permanent basis for the start of the 2006–07 season. Grayson retired from playing at the end of the 2005–06 season to focus purely on the managerial side of the game.