Restorative justice, an alternative to the traditional processes of arrest and punishment, is based on three basic principles.
The offender acknowledges they have done wrong, works to put it right, and is then reintegrated into society.
The total cost of the Isle of Man's criminal justice system is almost £15m a year and more than £7m of that expenditure goes on the prison service.
But the proposed changes are not just about saving money, Mr Watterson said.
"[Up to] 80% of the prison's costs are fixed costs anyway, so the savings to be had in this area aren't significant," he said.
"But, it's about building a better society where we can turn people around so they can see the error of their ways and choosing to take a different path in life rather than just locking them up, letting them mix with criminals and then coming back out to try out the new techniques they have learned inside to use."