I am embarking my first build and I have scoured these boards and I can tell you that most people use either the key -wiz or the ipac from ultimarc. I personally am using the encoder from an x-arcade that I have. You can buy an x-arcade BYO kit, but they aren't too popular on here because they aren't as easy to wire up because they have jumpers and harnesses instead of the screw-in type wire attachments. You get a lot of x-gaming bashing, but I think they make pretty good products, the support is pretty good too. Though, honestly if I didn't have an x-arcade I might have gone the ipac route, and I still may and either sell my x-arcade or donate it to a friend to keep spread the hobby/obsession.
Most people go keyboard encoder, since its easier to set up MAME that way.
Another option people use is the ultrastik 360, from ultimarc, which plugs into USB and has 8 button per joystick support. BUt I believe these are recognized as game controllers.
There are a million other ways to interface, from hacking console and pc game pads to hacking keyboards. There are also a lot of shops that sell different types of keyboard encoders. My advice though is go through groovy game gear or ultimarc. They are reputable, competitively priced and both Randy (GGG) and Andy (Ultimarc) lurk on these boards and provide beyond excellent support and service. I bought a led-wiz from GGG and their is a ton of support on the boards and from the company itself. I bought an aimtrak from ultimarc and Andy answered an e-mail I had about it within 24 hours. Shipping is super fast to from both places. Really, really love those guys and their passion for this hobby.
Finally, you may want to rethink the LED thing. Its slightly more complicated and a little more expensive, but in terms of user friendliness and wow-factor, its pretty cool. You can set up your CP to do all sorts of cool things like to illuminate the start button when a coin is inserted. Also, you can set up your CP to only illuminate the buttons that are being used for the game that is being played, which is what really sold me. It makes it easy for guests to just step up to the machine and play, and not get intimidated by all the buttons