The former England captain toured twice with Young for the Lions, tasting series success in South Africa in 1997 and then heading to Australia together four years later.
Dallaglio was impressed with what he saw from Young on those two adventures with Britain and Ireland's elite and he now sees equally impressive strengths in his former team-mate's coaching CV.
"It's a great move for Wasps. Dai Young was an outstanding player for Wales and for the Lions," Dallaglio told BBC Radio 5 live.
"He's got a lot of experience. He's done very well in Cardiff.
"I understand he was very close to getting the job at Leicester [before] they chose Richard Cockerill.
"He was also very close to getting a job at Harlequins. He's obviously got an appetite to coach in a different place."
Fans favourite Dallaglio believes Young can turn around Wasps' fortunes if given the role at Adams Park, although he admits it may take time.
The 2004 and 2007 Heineken Cup winners have struggled for form since their last English Championship-winning season in 2008 and Dallaglio isn't expecting an instant turnaround even if Young does complete a much-publicised switch.
"They had a disappointing season last year," added Dallaglio after Wasps missed out on both a Play-Off spot and a Heineken Cup place for the coming season.
"I don't think it's any magic wand stuff. It's going to take a bit of time to get them back where he wants them.
"There's still a lot of very good talent at the club. It's a good appointment and a real challenge for him."