Abstract: Serverless architecture has emerged as a transformative cloud computing model, offering SMEs scalable, cost-efficient alternatives to traditional infrastructure. By 2025, its adoption has accelerated, with the market projected to grow at a 22.2% CAGR, driven by benefits like pay-per-use pricing and automatic scaling. However, challenges such as cold starts, vendor lock-in, and security risks persist, particularly for SMEs with limited IT resources. This study investigates how serverless architectures can be optimized for SMEs, focusing on cost efficiency, scalability, and integration challenges. It aims to identify workload-specific trade-offs and provide actionable adoption frameworks. A mixed-methods approach was employed: quantitative benchmarking of AWS Lambda/Azure Functions versus traditional VMs under SME workloads (bursty traffic, batch processing, IoT streams). Qualitative case studies of SME implementations (e.g., e-commerce, healthcare) were used to analyze operational and security barriers. The goal was to design science research to develop a hybrid architecture decision matrix trial. Potential cost savings of 47-62% for variable workloads, but VM has superiority (12-18% cheaper) for sustained loads. There is 10x faster scaling with serverless, though cold starts affected 5.7% of invocations (1.4s latency). Hybrid architectures reduced TCO by 33% for mixed workloads. There are several security gaps including: 35% of SMEs faced IAM misconfigurations and serverless architectures are highly viable for SMEs with unpredictable workloads but require workload profiling and hybrid designs to mitigate limitations. Future research should explore AI-driven autoscaling and multi-cloud portability to address vendor lock-in.

Key words: serverless computing, SMEs (small and medium enterprises), cloud cost optimization, scalable architectures, hybrid cloud