The government has agreed to a timetable and all seven political parties represented in parliament have been invited to take part in the process, Key said in a statement.
"Our flag is the most important symbol of our national identity and I believe that this is the right time for New Zealanders to consider changing the design to one that better reflects our status as a modern, independent nation," Key added.
"However, as I have also said, retaining the current flag is a possible outcome of this process and the consideration of options will be done carefully, respectfully and with no presumption in favour of change".
Deputy Prime Minister Bill English would be the minister responsible for the flag consideration process, which would start with a Flag Consideration Panel, comprising a group of respected New Zealanders, seeking submissions from the public on new flag designs and suggestions.
The process would then go to two referendums: the first in November or December next year would ask the public to choose a preferred design from a range put forward by the Flag Consideration Panel, and the second referendum, April 2016, would be a run-off between the preferred design and the current flag.
Key stated before last month's general election that the country would decide on a new flag if his government was re-elected, and while the idea has support across the political spectrum, critics say it is a distraction from more important issues.
The current flag features the Britain's Union Jack design in the top left corner on a blue field with four white-outlined red stars representing the Southern Cross constellation.