Hybrid Semantic Tool Discovery for Enterprise MCP Gateway: Architecture and Implementation

Abstract

Large language model (LLM) agents invoke external tools to retrieve and reason over information beyond pretrained knowledge. The Model Context Protocol (MCP) standardizes how such tools are surfaced, and a proxy MCP server aggregates many backend servers behind a single endpoint providing a secure, governable chokepoint for authentication, policy enforcement, and observability. This architecture creates two compounding challenges: a context-engineering bottleneck where full tool schemas saturate the model context window before any user query, and a tool discoverability barrier where users and agents cannot identify the best tool among 2,000+ indexed tools across 200+ MCP servers. Prompt caching reduces reprocessing cost but neither frees context capacity nor improves accuracy. We present SCOUT (Selective Context Optimization for Universal Tooling), which reframes tool exposure as a context-selection problem, injecting only tools relevant to the current step. SCOUT surfaces two MCP meta-tools -- tool_search and execute_tool -- where tool_search performs hybrid retrieval, fusing BM25 sparse matching with dense vector search via Reciprocal Rank Fusion to return the top-k relevant tools. Backed by zero-downtime catalog update pipelines, SCOUT resolves both context saturation and tool discovery challenges. In production at PayPal, SCOUT reduces MCP tool-token consumption from 140.2k tokens (70.1% of context) to 1.3k tokens (0.8%), a 99% reduction, cutting per-query inference cost at enterprise scale. Because SCOUT is surfaced as standard MCP tools, it is model-agnostic and requires no client-side modifications.