I thought this was still a common practice--the watchmakers I have used in the past still did it. As long as it was done neatly I never had a problem with it. Do others collectors really frown on it?
It was my understanding that there was no established system of marking--every watchmaker used his own. One watchmaker who had worked in Chicago(now long dead) told me that, if the police found a watch on an identified body, they would circulate the repair numbers to local repair shops in hopes of finding the corresponding watchmaker, who in turn could give a name to the deceased.
As far as using the watch serial numbers as a tracking system instead, it seems to me that, in pre-computer days, this would be impractical--how would the watchmaker have maintained and searched such a large and ever-growing data base? (I guess he could have recorded each repair on a separate index card and filed by serial number, but think of how much space such a file would eventually occupy.)
As an anectdote, twenty-some years ago I took a watch back to my regular repairman and complained that it was not running right, even though I remembered him having cleaned it fairly recently. He looked at the number, checked his records, and showed me it had been almost three years since his repair. Needless to say I quickly stopped complaining.
I hope those of you out there who are more knowledgeable (and that's most of you) will correct me if I am wrong on any of this.