What is Shadow SaaS? Causes, Risks, and Management Tips

Security teams are familiar with the comforting sense of safety that comes from utilizing security controls like Single sign-on (SSO) providers to manage their organization’s major applications and critical tools. When these applications are routed through Okta, Azure AD, or other identity providers, your SaaS environment can seem managed and accounted for.

But lurking underneath is a significant vulnerability: the SSO blind spot. While you may be monitoring the front door, employees access numerous untracked applications through side entrances and back doors (social logins, personal email sign-ups, and direct password creations).

This phenomenon, known as Shadow SaaS, isn’t just an inventory problem. It’s a complex real-time security risk involving uncontrolled data exposure, excessive user-granted permissions, and unpredictable employee behavior. Critical user data ends up 'trapped' in unmonitored applications, making it impossible to accurately measure an individual’s true risk profile, thus hindering effective security management. This article outlines a step-by-step playbook to assess Shadow SaaS at your organization and guides you on how to move towards a user-centric risk management strategy.

What is Shadow SaaS?

Shadow SaaS refers to any cloud-based software or application used by employees within an organization without the explicit knowledge, procurement approval, or oversight of IT and security departments. It’s the modern, more pervasive evolution of a long-standing security challenge in the digital landscape.

How does Shadow SaaS differ from Shadow IT?

Shadow IT is a broader, historical term for unapproved hardware, software, or services used within an organization. Shadow SaaS, on the other hand, is a specific and rapidly growing subset of this problem, focusing exclusively on unmanaged cloud applications and services. For example, Shadow IT includes personal devices, like laptops, used to access company data, whereas Shadow SaaS describes unauthorized web-based applications utilized for tasks such as file-sharing corporate data or document summarization.

Since SaaS apps are often web-based, require no installation, and can be accessed instantly, they are far easier for employees to adopt independently. This low barrier to entry makes Shadow SaaS a more dynamic and challenging risk to manage than traditional unapproved on-premise software.

The rise of Shadow SaaS in modern enterprises

Shadow SaaS is becoming a massive problem in the modern digital workplace. There are thousands of specialized, user-friendly SaaS tools available, and paired with the shift to remote and hybrid work models, these tools empower employees to seek out and adopt applications that streamline their jobs and enhance efficiency. A drive for productivity is often a positive business enabler, but it becomes problematic when it significantly challenges current security policies.

What security teams are missing: The SSO blind spot

The main factor that allows Shadow SaaS to grow in an organization is the SSO blind spot. Most security teams have a false sense of security because their visibility is limited to applications connected to their official identity provider (IdP). Teams can see and control access to sanctioned tools, but this represents only a fraction of the full picture.

This lack of visibility is a massive, unmonitored blind spot for the hundreds of other applications employees sign up for using alternative methods. Microsoft reported that over 75% of employees who use artificial intelligence bring their own AI tools to work, with that number growing to 80% at small and medium-sized companies. Each of those tools exemplifies Shadow SaaS, especially when employees use 'Sign in with Google/Microsoft' with corporate accounts or register with their work email and unique passwords. 

These actions are completely invisible to the IdP, which means security teams have no idea the application is being used, what data is being shared, or what permissions have been granted.

Risks and security implications of unmanaged SaaS applications

Shadow SaaS is hidden by nature, and introduces a wide spectrum of risks that can have severe consequences for organizations—ranging from data leakage and compliance failures to significant reputational damage.

Data security, compliance risks, and Shadow AI

Employees often handle sensitive or confidential information when they are using unvetted SaaS applications. Examples include uploading customer lists to a new marketing tool, analyzing financial data in an unapproved analytics platform, or feeding proprietary company information into an unsanctioned “Shadow AI” tool. However, since these applications haven’t been reviewed or checked against security standards, there are no guarantees about how they store, process, or protect data. This gap can lead to data loss or create significant compliance violations if the data is subject to data protection regulations like GDPR, HIPAA, or CCPA.

The hidden danger of over-privileged access

The risks associated with Shadow SaaS also include the permissions it’s granted. Employees often approve broad, sweeping permission requests without scrutiny, especially if they want to use an application as soon as possible. These permissions could include granting access to “read all emails,” “view and manage all files on Google Drive,” “access your full contact list,” and more.

When an employee unknowingly grants over-privileged permissions to an unvetted third-party application, they effectively create a potential data siphon that could lead to serious security vulnerabilities. If that SaaS vendor is ever compromised or if the application itself is malicious, attackers can leverage those excessive permissions to access and steal massive amounts of sensitive information.

Reputational fallout and board-level concerns

Data breaches resulting from compromised Shadow SaaS applications can have a devastating impact on a company’s reputation and bottom line. The loss of customer trust can be difficult, if not impossible, to regain. Paired with the growing landscape of cybersecurity incidents and large-scale data leaks, boards of directors and executive leadership are increasingly concerned with these types of risks.

IT departments that are unable to demonstrate full visibility and control over their entire SaaS environment (including Shadow SaaS) pose a significant threat to organizational governance and risk management frameworks.

How to detect and manage Shadow SaaS effectively

Tackling Shadow SaaS requires a multi-faceted approach. Instead of merely blocking known applications, your goal should be to discover, assess, and manage the full scope of SaaS usage across your organization.

Step 1: Discover the unknown with technical audits

The first step is to gain visibility beyond your organization’s SSO provider to uncover unauthorized SaaS applications. Technical audits are essential for identifying traffic to unknown cloud services and unapproved applications. IT teams should focus on analyzing:

• DNS and firewall logs to identify frequent connections to unrecognized cloud application domains
• Browser extension inventories to see what plugins employees have installed, as many are gateways to SaaS services
• Endpoint data from EDR tools can reveal processes and network connections related to unapproved applications
• SaaS integration logs from your sanctioned platforms (like Google Workspace or Microsoft 365) to see what third-party apps users have authorized

Step 2: Engage employees to understand the "why"

Technical SaaS discovery tells you what is being used, but it doesn't reveal the underlying motivations. Understanding the “why” is vital to identifying business needs or workflow gaps that are driving employees to utilize unsanctioned tools for different functions. Engage with employees through use-case surveys or focused application inventories, with a focus on a collaborative approach to security. This information can help you identify needs for new officially sanctioned tools and foster a collaborative security culture where employees become partners rather than adversaries.

Step 3: Move from inventory to intelligent risk prioritization

Shadow SaaS management doesn’t stop at discovery—with potentially hundreds of Shadow SaaS apps in use, attempting to address every single one is inefficient. Aim to prioritize risk intelligently, starting with utilizing vendor security ratings to get a quick, objective score of a discovered application’s security posture.

Consider also connecting discovered app usage to individual employees and aggregating this with other data points to create a unified user risk score, providing a holistic view of potential vulnerabilities. For instance, a user who has connected one low-risk, unapproved project management tool is a much lower priority than a user who has unauthorized access to multiple high-risk applications, a history of poor password hygiene, and has recently failed a phishing simulation. This user-centric approach allows you to focus your limited resources on the users and applications that pose the most significant threat.

Step 4: Implement a nuanced response strategy

Now that you’ve prioritized risks, you can move beyond a simple “block everything” mentality to a more nuanced, risk-based response. Implementing this approach isn’t merely about denying access; it’s about enabling business security. A robust response strategy should include the following:

• Vet and sanction: Establish a fast-track process for vetting and officially sanctioning low-risk, high-value apps that employees are currently using.
• Provide alternatives: For high-risk or redundant apps, provide and actively promote a sanctioned, secure alternative that meets the same business need, thereby solving the user's problem and reducing risk.
• Apply granular controls: For moderately risky apps that are business-critical, implement granular security measures through access policies or cloud access security broker (CASB) tools to restrict high-risk activities or limit access to sensitive data, thus enhancing overall security posture.
• Block and educate: Reserve outright blocking for only the highest-risk applications. When a block is implemented, use it as an opportunity to educate the user on why the tool was deemed unsafe and guide them to a secure alternative, reinforcing secure practices.

Beyond the blind spot: A new approach to SaaS security

Relying on SSO monitoring alone creates a dangerous blind spot, leaving organizations exposed to the pervasive risks of Shadow SaaS. The true danger often lies not just in the existence of these unapproved applications, but in the excessive permissions and unvetted data access that accompany them. The path forward requires a strategic, user-centric approach that moves beyond a simple inventory to a continuous cycle of discovery, risk assessment, and nuanced response. True SaaS security comes from understanding not just what applications are being used, but who is using them and how.

This is where a dedicated solution becomes critical. UpGuard helps organizations put this proactive strategy into practice by providing a unified platform to address the challenges of Shadow SaaS. Key capabilities include:

• Comprehensive attack surface management: Identify and monitor all of your organization's digital assets, including previously unknown or unsanctioned SaaS platforms, to eliminate the SSO blind spot.
• Continuous discovery and alerting: Receive timely alerts when new or unauthorized applications are detected in your environment, reducing the security gaps created by Shadow SaaS.
• User-centric risk intelligence: Gain deep visibility into the permission risks and user behaviors associated with SaaS adoption, enabling more proactive and informed security posture management.

This approach empowers security teams to better understand and mitigate threats, supporting a more secure and well-governed SaaS environment.