Ratcheting up its customization capabilities, Salesforce.com will use its inaugural Dreamforce User & Developer Conference this week to launch the Winter 04 release of its hosted CRM service.

The company will also unveil Version 2 of Sforce, its XML-based platform for corporate developers. Sforce is designed to extend Salesforce.com’s capabilities by providing customizing and integration tools for the application.

The launch comes at a time when Salesforce.com is facing renewed competition from Siebel Systems Inc.

Having completed its acquisition of hosted CRM provider UpShot, Siebel this week will announce beta customers for its recently unveiled OnDemand hosted service. The company is also attempting to spoil the Salesforce.com party by arguing that enterprise customers want a mixture, or at least the choice, of on-premise and hosted CRM.

In response, Salesforce.com is improving the Sforce platform’s customization capabilities to give customers more control over applications.

“Winter 04 and Sforce 2.0 are superior (to) a traditional software model,” argued Salesforce.com Chairman and Chief Executive Officer Marc Benioff. “We have this client service architecture that can be deployed in an organization regardless of scale and deliver equivalent high functionality to a enterprise with the simplicity that Salesforce.com customers have come to expect.”

Other extensions to the platform include S-Controls, which allows developers to customize the user interface to create forms. It supports any client-side browser technology, including JavaScript, DHTML and .Net controls, and Web services user interfaces such as DreamFactory, said Adam Gross, Salesforce.com’s director of product marketing for Sforce.

On the user side, Salesforce.com is adding dashboards, real-time alerts, contract management tracking, and workflow automation to trigger business processes.

According to Kaiser Mulla-Feroze, director of product marketing at Salesforce.com, the company appeals to enterprise customer due to the lower initial cost of hosted CRM and the ability to create custom objects for vertical industry applications.

Magma Design Automation Inc. is already using Salesforce.com’s integration capabilities. According to David Brooks, director of CRM at Magma, the software development company’s unique situation requires that its customer-facing support system include bug tracking for its worldwide base of software engineers.

“With XML APIs (from Sforce) and scripts we put in place, a team of two guys in a month wrote several Python scripts with a Unix command interface that allow us to talk to Salesforce and Python’s RPC (Remote Procedure Call) interface,” Brooks said.

Siebel is also working on integration and claims to have 140 integration applications in place, of which 70 are specific to vertical industries. According to Siebel Executive Vice-President David Schmaier, the company has an additional 100 integration applications under development.

Schmaier explained that the company’s strategy is designed to give companies the choice, or any combination of, on-premise or hosted CRM.

“The probability that General Motors or Marriott will host everything is approaching zero. Our view of it is, you might have some projects where the economics of hosted (CRM) makes sense,” Schmaier said.

Siebel’s Web services-based Universal Application Network (UAN) is the platform that will enable its hybrid on-premise/hosted CRM, and serve as a competitive advantage. “We can out-integrate anyone else on the hosted side,” he said.

Siebel is also designing its offerings to be delivered through any medium, from traditional PCs to mobile devices, WebTV, kiosks, and laptops, Schmaier said.

Salesforce.com, on the other hand, does not believe customers are looking for both on-premise and hosted CRM solutions.

“It is very black-and-white. If you mix, you are taking out the benefits of OnDemand,” Salesforce.com’s Mulla-Feroze said. “What about upgrades? There are a lot of hidden issues (with on-premise CRM). It sounds seductive, but it is a big, big black hole.”

Nevertheless, some companies are already using hybrid approaches. Canon Canada, for example, uses RightNow’s hosted eService Center for its consumer Web customer support tool and on-premise PeopleSoft CRM for managing its inbound customer activities.

Steve Mackay, senior manager at the Canon customer information centre, said that linking the two systems allows Canon to apply the same business rules, escalation rules, and notification processes.

“It allows the agent to get a holistic approach to the customer experience,” Mackay said.

When an e-mail comes into the corporate gateway from RightNow’s hosted solution, the system performs field-matching and populates the fields in PeopleSoft CRM. When the agent responds to the customer, the e-mail is passed back through RightNow’s gateway.

Companies have other, nontechnical reasons for choosing either hosted or on-premise CRM, according to Barton Goldenberg, president of Information Systems Marketing Inc., a CRM research company. For example, a company may not be comfortable with a hosted solution because it worries about the security of its customers’ data, he said.

On the other hand, hosted CRM offers lower initial costs and a lower total cost of ownership. Hosted CRM is a valuable option for companies such as Polaroid Corp., said Yale Cohen, Polaroid’s group manager of worldwide service communications. Choosing RightNow’s hosted CRM solution has helped during the downsizing associated with filing for Chapter 11 bankruptcy, he said.