Lillo made his name as a manager at UD Salamanca, joining the club in mid-1992 at the behest of the club's chairman, Juan José Hidalgo. In his first season he finished second in the third level, narrowly missing out on promotion playoffs, which he attained the following campaign without any major changes to the team. This prompted reported interest from La Liga outfit Real Valladolid, but the coach stayed with Salamanca until the end of 1995–96, with the club then in the top flight – this made him the youngest ever person to manage at the highest level, at only 29; after 28 games in charge, with Salamanca four points into the relegation zone, he was dismissed, but players and fans publicly opposed the sacking, supporting him in recognition of his achievements – Salamanca finished in last position, eleven points behind 21st-place CP Mérida.
Lillo then had some spells in the top division: in the 1996–97 season he worked with Real Oviedo, but was fired before its closure due to poor results. He returned to management in February 1998 with CD Tenerife, helping them avoid relegation in his first year; the following campaign, however, he did not see out the year, being sacked after 15 matches as the team was ultimately relegated.
After a year-and-a-half break, Lillo returned to take the reins of Real Zaragoza – the team had qualified for the UEFA Cup the previous season, and manager Txetxu Rojo moved to Athletic Bilbao. He set about fulfilling the task of progressing in the European competition and repeating European qualification through the league, but did not achieve this, being released from the head coach position after barely three months.
In 2005 Lillo went to Mexico, joining Dorados de Sinaloa and resigning mid-season (the club would also eventually drop down a division). He insinuated that the team he was battling against to avoid relegation, Televisa-owned San Luis Fútbol Club, had gained unusual victories against more powerful opposition, which were also owned by the Televisa group; this caused much controversy in both the Mexican press and football league.
Following the incident, Lillo spent the following two years away from football until he was appointed as the new head coach of Real Sociedad in April 2008, with the Basque in division two. Despite losing only once during his tenure, he saw the club fail to reach a promotion spot, after finishing in sixth position, and was replaced by Martín Lasarte.