Watson began his coaching career as assistant to Mike Williamson at Gateshead in 2019 and guided them to the National League North title and FA Trophy final.
The pair moved to MK Dons in 2023 and reached the League Two play-off semi-final the following year.
Both joined Carlisle United in September 2024 and, having returned to MK Dons in a coaching role, Watson was appointed by South Shields in May 2025.
He transformed the club’s fortunes after they had finished 17th in 2024-25 and guided them to the highest finish in their history.
The club battled with AFC Fylde for automatic promotion and the National League North title until the final game of the season.
His move to Rochdale comes as the club prepare for their return to the EFL having spent three years in the National League.
“Ian is a coach that we have been tracking for some time and has been in high demand this summer,” co-chairs Cameron Ogden and Simon Gauge said.
“We are glad that we were able to secure our main target once Jim had left.”