He will have former All Black, Hurricanes and Wellington player Jason O'Halloran as his assistant coach, the pair having worked together during Cotter's time as Scotland's coach.
Cotter said, in a statement, he was enthusiastic about winning the position.
"I've watched the Blues thrive in recent seasons, and I'm excited by the challenge of taking them forward and building on what is a very strong base.
"It's great to have Jason joining me at the Blues. Since our time in Scotland, we've remained firm friends and often pick up the phone to discuss trends in the game. I know he'll add real value to an already strong coaching team.
"When you take a new role, it's important to acknowledge what's been going well for a team while constructively challenging aspects you feel could improve. I can add fresh thinking, informed by my broad and varied coaching experiences.
"I'm looking forward to getting stuck in with the Blues, and I'm energised to be back in New Zealand coaching at Super Rugby level."
Cotter played 15 games for Counties Manukau in 1986, 1989 and 1990, while he played 12 games for Bay of Plenty in 1987 and 1992. He headed to France playing at various clubs during the 1990s.
He returned to New Zealand to coach Bay of Plenty from 2000-2004 before having two years as forwards coach of the Crusaders. After that period, he was made head coach for Clermont Auvergne for the 2006-07 Top 14 campaign.
They finished second to Stade Francais and won the minor premiership the following season, only to finish second again, this time to Toulouse in the finals. After the third grand final loss a season later, the club did take out the title, their first, in the 2009-10 season when beating Perpignan in the final.
Semifinal losses occurred over the next three seasons, and then in 2013-14, the side was tipped out in the quarterfinals.
In the Heineken Cup, the club made the knockout stages for the first time in 2009-10 and played their first Cup final in 2012-13, only to lose to Toulon. In 2013-14 they were knocked out in the semifinals again.
Cotter then left France to take on the role of Scotland's head coach, which saw him take the side to the 2015 Rugby World Cup, a tournament in which they suffered a controversial 34-35 loss to eventual runners-up Australia due to the awarding of a disputed penalty to the Australians.
Scotland said they would not renew Cotter's contract beyond the 2016-17 Six Nations, which proved to be Scotland's most successful for several seasons – beating Ireland 27-22, Wales 29-13 and Italy 29-0. At that stage, he left the side with a 53 per cent win rate, Scotland's most successful coach of the professional era.
He had three years with Montpellier back in France before accepting the position of head coach with Fiji, a position that was ended before the completion of his contract when a government change called for a local coach to take on the role.
Blues chairman Don Mackinnon said the board was happy with its coaching mix for 2024 and beyond and felt Cotter was the right man to set the direction for the coaching group and to continue the development of the group's younger coaches.