I've just added a 3-axis Universal DRO (from Allendale) to my Chester Centurion 3-in-1, and am using Renishaw / RLS 1um magnetic encoders.
I've used the Allendale 2-part tape support as well, a fantastic modification and one that means both the readhead and tape are totally sealed and can be doused in grease and swarf and coolant. I don't have to worry about bashing anything either.
The readout has transformed my performance. I'd hesitate to say it's changed the machine's performance as the back-lash and sloppy handwheels are all still there, but my ability to overcome these and produce accurate parts has been transformed!
As was mentioned above, even though the backlash is there, provided you've attached the scale and readhead to the correct parts of the machine, the DRO will always be reporting actual position. Things it can't compensate for are when the tool slips in the toolpost / collet or the workpiece slips in the vice etc. But if everything is held tightly, then if the table / toolpost move then the DRO will show this – then just wind the handle to compensate. Key to this is just to think about what's moving, and what the encoder is measuring. Get your head around this and you'll be fine.
DROs can't compensate for anything, so you still have to approach the same problems in the same old way, there's no substitute to age-old techniques etc. But the DRO will give you a much better idea as to what is actually happening, without having to back off & measure etc.
Finally, I'll add that of course a 1um encoder will not enable me to produce parts to 1um tolerances. I should imagine my machine has all sorts of slop and lack of stiffness that means I'd be lucky to get to 10um tolerances. But that's got to be an improvement on using Chinese handwheel scales!
I used to work for an encoder manufacturer, so I know a little about the subject and it meant I was able to get the encoders for free – the whole exercise has cost c. £250. But I'd recommend it to anyone.