In 2002 Penney retired to pursue a career in management and he remained at Doncaster, taking the managerial job on a full-time basis. After a well-placed finish in his first season, Penney guided Doncaster back into the Football League with victory in the play-off final in the 2002–03 season. Their stay in Division Three wasn't long though as he managed Doncaster to the Division Three title. During a further two seasons of cementing Doncaster's place in Coca-Cola League One Penney famously masterminded victories over Premier League sides Manchester City and Aston Villa, and nearly overcame Arsenal in the League Cup quarter-finals before finally being beaten in a penalty shootout. Penney left Rovers on 30 August 2006 as he felt he had taken the club as far as he could.
Penney was appointed manager at Oldham Athletic on 30 April 2009. He left on 6 May 2010, through mutual consent, with falling attendances one of the reasons why Penney was relieved of duty.
On 10 January 2011 Penney was appointed as manager of League One club Bristol Rovers. His tenure in charge of the west country club did not last long however, as he was sacked less than two months later having lost nine of his 13 games in charge. His last game was a 2–0 defeat against Dagenham and Redbridge. Following receiving the sack from Bristol Rovers, Stuart Campbell was put in charge for the game against Tranmere, in which a Chris Lines goal sealed a 1–0 win.