The Highlanders announced yesterday that Dermody (34), a former All Black prop, will start his fulltime role immediately.
Dermody played three tests for the All Blacks in 2006 then left at the end of the following season to play overseas.
He racked up 44 games for the Highlanders, first playing in 2004, and also gained 92 caps for Southland.
He left New Zealand for a contract with London Irish and played more than 100 games for the club before a lower back injury ended his playing career.
Last season, Dermody came in to assist the Highlanders scrum on an unofficial and part-time basis.
Dermody said although he enjoyed this time with the Highlanders last season it was not really working as well as it could have.
''This next season I will be able to be in there right from the start ... we have got some young stock to work who have come through this season,'' Dermody said.
''We played against most of them this year in the ITM Cup so I've got a fair idea of what they have and what their abilities are.''
He said most scrums had now adapted to the new scrummaging laws introduced last year and it was now about winning the contest.
''The scrum is still a key part of the game. If you can win your own ball then it is the best ball to work with.''
Dermody was assistant coach this year for the Southland side, which made the semifinals of the ITM Cup championship, and he will continue in this role.
His wife, Sarah, and children Carter (8) and Maggie (4) will remain in Invercargill but he will be based in Dunedin for the season.
Highlanders head coach Jamie Joseph said Dermody's role this year - when he travelled from Invercargill to assist the side's scrum - was not ideal for either his coach or player development.
''I am confident that with Clarke's appointment and the recruitment of extra stocks in the front row we can significantly improve our scrum over the coming months,'' Joseph said.
The side had named six props in its squad as it was exposed last year when it only had five props and, at any time, one was regularly injured.
Highlanders general manager Roger Clark said Dermody's appointment coincided with a redefined role for Preston in the coaching team.
Preston will work as the Highlanders high performance coach with a focus on individual skill development of contracted Highlanders players in addition to developing talented youngsters within the Highlanders regions.
