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You can't update another object when one object is updated i.e. Custom Object can't be updated automatically using Workflow when Contact Object is updated. You need to use Web Services to do this. All you have to do is define some Integration Events on the Parent object (which triggers the Update) and then based on the Integration EVent, update the Child Object (which needs to be updated).
BTW, this is not related to Contact On Demand, it is related to CRM On Demand Topic