Royle will take up a role in Roberto Martinez's backroom staff helping with youth development and scouting at Goodison Park.
The likes of Wayne Rooney and Ross Barkley have come through the Premier League club's academy in recent years, and former Everton manager and striker Royle knows the importance of investing in youth.
Royle described his return as a homecoming and the 65-year-old is looking forward to playing a key role at the club.
He told Everton's official website: "It's coming home and another phase in my Everton lifetime. I've stood on the terraces, been a player and a manager here.
"Now I'm working with the academy and with Roberto, Kevin Reeves [chief scout] and David Unsworth [Under-21s coach] to look at the futures of those who are hopefully going to be Everton players.
"I’m excited. It's a role that I first spoke to Roberto about last January. It's taken this time for the role to develop and I'm rather pleased to back.
"I’ve been in football a long time, I've been in the professional environment and around football people over half a century.
"I was particularly happy with my big signings here as a manager and I was happy with the signings I made at Oldham that went on to be big players but, more than anything, [it was] the faith in the young players.
"Roberto shares that faith - he wants to see a side here heavily dependent on Everton's own products. As a fan - no one has ever disputed I'm an Evertonian - you do like to see your own come through."
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