ParaTool: Shifting Tool Representations from Context to Parameters

Agentic tool-calling language models depend on large registries of callable APIs, functions, and local actions. Placing full tool specifications directly in the prompt incurs a cost that scales linearly with the size of the tool registry, rapidly consuming the context budget. As the registry grows, this leads to higher latency and degrades selection accuracy, particularly due to interference from irrelevant tools. We overcome these limitations by introducing NTILC, a neural tool selection and invocation framework that replaces in-context registry look-up with learned latent retrieval. NTILC maps both user intent and tool specifications into a shared embedding space, enabling tool selection via external retrieval rather than in-context lookup. The language model is conditioned only on the selected tool schema, allowing for precise, constrained argument generation. Central to our approach is a signature-aware composite objective, which augments semantic similarity with constraints derived from tool signatures (e.g., argument schema, type compatibility, and return types). By combining Circle Loss with a Functional Margin Loss, the model enforces separation between tools that are semantically similar but incompatible under their execution signatures. We evaluate NTILC on public tool-selection and function-calling datasets and report context token usage, retrieval accuracy, and selection latency metrics. Across these settings, NTILC reduces context window consumption by over 95% and inference latency by up to 74% compared to long-context ICT baselines.

Large language model agents derive much of their capability from tool use. Existing research on tool use has largely focused on selecting the right tool and orchestrating the order of calls. However, correctly filling the parameters of a tool call is equally critical for successful execution and has received far less attention. In domains such as cloud networking, even frontier models correctly complete fewer than half of tool calls. Inspired by recent analyses showing that LLM hidden states encode rich information about model predictions, we discover that while the model generates a parameter value, its hidden state contains a strong correctness signal: a simple linear probe can accurately predict whether the value will be correct. Based on this observation, we propose a unified probe-guided framework with two complementary approaches: probe-filtered bootstrapped training (PBT), which uses the probe to filter reliable self-generated calls for fine-tuning, and probe-guided reranking (PGR), which uses the probe to select better candidates during inference. To support systematic evaluation, we release ParamBench, a benchmark built from real cloud-network APIs that categorizes every instance into five difficulty levels according to parameter nesting depth, cross-parameter dependencies, and the reasoning required to derive values from earlier calls. Extensive experiments across 5 open models on ParamBench and 6 external benchmarks demonstrate that our method substantially improves parameter generation, raising the average exact match from 19.7% to 59.6%.

Large language models deployed as agents over large tool catalogs face a critical tool-retrieval bottleneck. As embedding-based retrieval approaches rely on compact encoders that may under-capture specialized tool semantics, parametric tool retrieval addresses this by encoding each tool as a virtual token appended to the LLM vocabulary, fine-tuned in two stages (memorization then retrieval SFT) to use the LLM as a retriever, achieving strong performance on standard ToolBench retrieval benchmarks. Yet these benchmarks use verbose, fully-specified queries, and their evaluation applies constrained decoding that restricts outputs to valid token paths, neither reveals whether the model actually understands its tools. We introduce \textbf{ToolSense}, an open-source LLM-powered diagnostic framework that takes any tool catalog as input and automatically generates three benchmarks: a Realistic Retrieval Benchmark (RRB) with queries at three ambiguity tiers, an MCQ probing benchmark, and a QA probing benchmark. Applying ToolSense to ToolBench (~47k tools) and evaluating five parametric model training configurations reveals a knowledge-retrieval dissociation: on RRB queries, several configurations collapse by ~50-64 percentage points compared to fully-specified ToolBench benchmarks, falling below the embedding-model baseline. Additionally, despite strong retrieval performance, some models score near-random on factual probes, suggesting a knowledge-retrieval dissociation. We open-source the ToolSense framework and the ToolBench diagnostic benchmarks at https://github.com/SAP/toolsense.