New Blues head coach John Kirwan approached Henry, and he will join the backroom staff alongside All Blacks skills coach Mick Byrne and Grant Doorey.
"There has been a bit of water run under the bridge since the World Cup and I'm in a position where I can do this now," said Henry.
"Why do it? Because l love it basically. I really love the coaching process of being involved with a team and I've missed it and I'm looking forward to being involved again ... in a lesser role obviously."
Henry won three titles with the Blues in 1996, 1997 and 2003 before moving on to the All Blacks and he is delighted to be back.
"It's my home base, this is where I grew up and I have a lot of good memories of that. The Blues are my franchise."
The appointment will replace his current contract with the New Zealand Rugby Union which sees him mentoring domestic coaches but he will still be able to take up other opportunities.
"So this does several things: It brings me home; it cuts down the travel; and it fulfils the disease I've got to still be involved in coaching."
The Blues endured a disastrous campaign under Pat Lam but Kirwan is confident he has assembled a coaching staff that can put the former giants back on track.
"One of my presentations was to have a world class coaching staff and I believe that's what we have got.
"Graham and I had a fantastic meeting, Graham is like myself in that he is passionate about this franchise and passionate about us being successful. So it wasn't too hard."