Westley was made caretaker manager of Derby County in January 2006 following the departure of Phil Brown. He lost his first game in charge 1–0 at home to Sheffield United and despite not managing a win in four further outings, was made manager until the end of the season. His first victory was a 1–0 home win over Plymouth Argyle just two days later. Despite achieving his objective of keeping the club in the Championship by the end of the season he was not offered the job of permanent manager, instead being replaced by Billy Davies.
He joined Birmingham City as director of their youth academy in 2006. In his first season, he led the under-18 side to the quarter-final of the FA Youth Cup, and two years later they reached the semi-final of the same competition. After completing a report to the club's board of directors, which contained recommendations needed to "push [the Academy] to the next level", Westley left the club by mutual consent in February 2011. in July 2014 Westley became academy director at West Ham United, replacing long-term incumbent, Tony Carr.
^Tattum, Colin (10 February 2011). "I am proud of what I did for club – Terry Westley". Birmingham Mail. Retrieved 9 March 2011. It is not thought that Westley and the board were necessarily at loggerheads over his recommendations, culminating in the parting of the ways. Moreover, he has probably felt for a while that he needed a new challenge, and the owners have made clear their demand for a more productive Academy and perhaps believed their own man was needed to head things up in order to truly realise their vision for the future.