In the standard rules, armor reduces the chance of being hit, but doesn't mitigate the effects of blows. In this variant, armor serves both purposes - it both increases armor class (at a reduced rate), and provides damage reduction against attacks. When using this system, hits will be more frequent, but their impact will be reduced.
The base AC bonus normally provided by armor is split between a plus to AC and a certain amount of DR/-, as listed in the tables below. For creatures with a natural armor value, one fifth of their natural armor is converted to DR (rounded down) - reduce their natural armor by this amount after the calculation.
This change only impacts the base armor class granted by armor and natural armor. It does not apply to enhancement bonuses to either, nor to shields, deflection bonuses, or any other armor bonus. This DR does stack with any other source of DR/- that the wearer is benefiting from (such as adamantine).