Shadow IT versus Shadow AI: Definitions, Differences, and Implications for SMBs

If you’ve ever lain awake at night wondering, “Are my employees using shadow AI or shadow IT?” - you're not alone. You know shadow tools are a problem and you’re always on high alert for solutions. BUT you find the constant drumbeat of flashy ads hyping shadow IT or shadow AI detection tools exhausting. 

While these detection tools promise complete visibility of your digital assets, many of them are overkill for your smaller business and budget. They often require significant technical expertise to deploy and come with Fortune 500 price tags. 

This is where SaaS Monitoring comes in. 

If you’re wondering how it works, we’ll explain in just a few moments. 

Shadow IT versus Shadow AI – the crucial distinction that can make or break your business 

But first, let’s talk about the elephant in the room. 

Many businesses lump all “unapproved tech” together, but there’s actually a crucial difference between the two. 

As you know, shadow IT is any type of hardware or software used without express permission from you or your IT team. This includes: 

• personal devices like smartphones & tablets 

• productivity apps like Trello, Notion, and Asana 

• file sharing tools like Dropbox, WeTransfer, Google Drive, and iCloud 

• communication apps like WhatsApp, Zoom, and Signal 

Meanwhile, shadow AI is an unapproved AI tool like: 

• OpenAI’s ChatGPT, Microsoft CoPilot, and Google Gemini  

• email marketing automation tools 

• data visualization apps 

• Grammarly, a writing assistant that uses generative AI to streamline the writing process and detect plagiarism 

• Canva, an online graphic design platform that uses AI to write copy, generate design ideas, and create interactive elements 

Employees who use AI-enabled tools can expose their organizations to risks related to data privacy and intellectual property infringements. 

While shadow AI is as problematic as shadow IT, it can introduce more severe risks for your business. With shadow AI, one click is ALL it takes to introduce significant legal and compliance challenges for your business.  

Stay with us as we explain why. 

Five (5) ways shadow IT and shadow AI can bring chaos to your business – you won’t like #3  

#1 Increased risk of non-compliance - putting your brand reputation and business on the line 

Are you measuring SaaS app usage based on data provided by your identity provider (IdP)? If so, you may be vastly underestimating your SaaS app footprint. While “official” reports say the average organization uses 93 SaaS apps, Grip’s 2025 SaaS Security Risks report says it’s actually an average of 835 — nearly ten (10) times more. 

The difference of 742 apps represents unmanaged IT and AI tools, which shows shadow SaaS is a greater issue than most SMBs (small and medium sized businesses) realize. 

The average business actually uses 67 Gen AI tools. Notoriously, unapproved shadow AI tools often lack adequate security protections like encryption, access controls, and audit trails - which may cause your business to violate data privacy laws like HIPAA, GDPR, DORA, SOC 2, PCI DSS, and CCPA. 

If you do business in the EU, the GDPR ChatGPT Task Force has made it clear data protection can’t be shifted to your employees. As the data controller, your business remains accountable, even if you’re unaware of any unauthorized AI use.  

In all, shadow AI leaks could cost your business 4% of its global revenue in GDPR fines. And ONE data breach could take seven (7) months of damage control: How many customers will you lose while you rebuild? 

Ultimately, Shadow AI is a compliance time-bomb that can destroy both your carefully nurtured reputation and business. 

#2 Lack of visibility - creating blind spots you can’t track 

Shadow AI and shadow IT can create operational blind spots, the enemy of security. In all, 76% of SMBs say they struggle to detect shadow IT. Meanwhile, each prompt or query typed into an AI platform is a potential leak. If a member of your team pastes a customer email into ChatGPT, for example, any PII or PHI could be accessible to people around the world within days. 

And while AI code generation tools can offer a productivity boost, engineers who use them for coding tasks risk exposing proprietary code and trade secrets. 

Output from unapproved AI tools can also invite legal challenges. For example, in Mobley vs. Workday, plaintiffs argued that Workday’s AI-driven employment screening tools rejected applications based on factors other than qualifications.  

#3 Data loss and security breaches – putting you on the fast track to a million-dollar breach 

Unmonitored SaaS apps often lack proper security controls, so attackers can exploit weak credentials to gain initial access to your network. 

Once that access is gained, they shift their focus to lateral movement, escalating privileges until they reach your most critical assets. Here’s more bad news: The average breakout time – the span between initial access and lateral movement – is now only 48 minutes. 

And since attackers only need about four (4) hours to exfiltrate data, 65% of businesses with shadow IT will suffer data loss once their systems are breached. 

That’s not all: Up to 40% of data breaches are caused by data stored in unsecured public cloud environments. Public cloud platforms like AWS and Azure operate on a Shared Responsibility Model: they secure the infrastructure, while you secure the data you put into it. 

Although these platforms offer robust security features, storing proprietary code without the proper configurations and access controls (such as using the strongest MFA options), can put your data at risk.  

For example, data copied to public cloud storage for testing purposes may be forgotten or left unmanaged, which results in shadow data. Breaches involving shadow data take 26.2% longer to identify and 20.2% longer to contain than those that don’t. 

According to IBM’s 2024 Cost of a Data Breach report, data breaches involving public cloud storage and shadow data incur the highest costs, averaging US $5.27 million per incident.  

With shadow tools, ONE breach is all it takes to bring your business to a halt. 

#4 Operational disruptions – forcing you to bleed cash every hour your system is down 

If you’re doing business in 2025, shadow tools are a big deal.  

As SaaS apps grow - unchecked and unknown – redundant subscriptions and missed volume discounts will quietly erode your margins.  

Here’s the ugly truth: every time an employee uses an unvetted app, it could put a potential strain on  your cash flow. The average organization pays for 247 SaaS app renewals per year – that's one renewal per day. Meanwhile, 53% of SaaS licenses go unused, leading to a whopping $21 million annually in wasted spending. 

And if your employees also use unapproved shadow AI apps? Breach costs can hit millions and take nearly 300 days to contain. 

Meanwhile, regulatory fines are often substantial and must be paid promptly. This can drain your cash reserves, disrupting your ability to cover operational expenses and payroll obligations.  

#5 Increased risk of cyber-attacks – skyrocketing your cyber insurance premiums  

Shadow IT and shadow AI aren’t covered by your organization’s cybersecurity protections such as endpoint threat detection & response, firewalls, and regular patching. This gives threat actors more entry points to infiltrate your system and install malware or ransomware. 

In 2025, 75% of UK CISOs now see insider threats, amplified by using shadow AI and shadow IT, as a greater danger than external attacks. 

As cyber-attacks rise in frequency and sophistication, insurers are tightening terms and raising premiums.  

So, your business may face rate hikes of 50 -100 % - or even outright denials – if your cybersecurity protections are deemed inadequate. 

The truth about why your employees use shadow IT and shadow AI – and why it’ll never stop if you do these three things 

If you’re still reading, you know it’s decision time. After all, you built your business by making tough calls, and you’re ready to do so again. 

But what do you do when enterprise-grade shadow AI and shadow IT detection tools are beyond reach? With few options, you may be tempted to try these three default moves – but although well-intentioned - they can actually make things worse. 

#1 Reprimanding your employees about policy violations 

You lay down the law, hoping your team will understand what’s at stake. 

Unfortunately, your employees will interpret your new approach as heavy-handed and unreasonable. As a result, they’ll dig in, stop communicating with you, and take creative risks to get their work done. 

With a 21.5% increase in workplace incivility since Q1 2024, issuing reprimands can add fuel to the fire. What employees perceive as increased workplace stressors comes with a hefty price tag, costing employers over $2.1 billion each day in absenteeism or lost productivity. That’s an eye-watering $766 billion annually. 

#2 Launching internal investigations to catch the “culprits” using shadow tools 

It may seem like the right thing to do, but hunting for “culprits” just wastes precious time and energy. 

When you respond with crackdowns, your best people will feel unfairly targeted. The gap between leadership and your team will widen, while innovation goes underground.  

According to MetLife's 2025 Current State of Holistic Health report, almost 40% of employees fear AI will cause tension between them and their employers.  

Here’s why: Employees worry they’ll be perceived as untrustworthy and that they’ll face disciplinary action if their unauthorized use of AI is discovered.  

At the same time, many feel compelled to use AI to retain their competitive edge. The perception that leadership isn’t keeping pace with their needs fuels a sense of unease and contributes to workplace tension. 

And while 87% of employers say they DO demonstrate caring, only 52% of employees agree. That’s a 35-percentage point gap. 

You aren’t wrong to worry about security, compliance, or your reputation. But the root cause of shadow IT and AI isn’t disloyalty or malice – your team just wants to work faster and achieve more. 

When you lead with fear and force, you lose the chance to benefit from conversations that position you as an enabler of progress. According to Deloitte, over 70% of employees will stay with an organization if its corporate culture helps them thrive in an AI-driven world. 

#3 Attempting to enforce stricter controls – without addressing the underlying reasons for shadow IT adoption 

Finally, here’s the worst action you can take: Clamping down with more rules out of desperation to regain the upper hand. 

While you’re right to ensure responsible usage, attempting to enforce stricter controls without addressing the root causes of shadow tools can backfire spectacularly. 

According to Harvard Business Review, workers think their employers often send mixed messages about AI. While touting a “culture of agility, collaboration, and innovation,” leadership teams inevitably default to skepticism and control when it comes to these cutting-edge tools. 

A smarter path forward: Managing shadow IT and shadow AI without conflict 

If you’re ready to empower your teams, here are two (2) easy ways to turn shadow tools into a business advantage: 

Educate, don’t alienate 

Treat your employees as part of a valued human firewall. 

Here’s how: Implement ongoing training, where you teach them to understand the risks of shadow IT and AI through immersive gameplay (yes, you read that right). Gamified training enhances retention by transforming learning into an active experience. 

It also makes for a happier team: 78% of employees say gamification makes their workday more enjoyable, while almost 70% will stay longer at a company that uses gamification. When you foster a culture of shared responsibility, your team becomes your first line of defense, not your biggest threat. 

Provide better tools 

Offer secure, approved SaaS and AI tools that solve real-world problems for your team.  

Here’s how: Foster a culture of transparency where employees feel safe to disclose what tools they’re using and why. You’ll uncover a goldmine of insight that reveals which tools can make your business run faster and smarter.  

Then, you can include them in your list of approved tools, complete the necessary due diligence process to onboard the provider, and use an enterprise-grade password manager with SSO and MFA functionality to implement strong authentication controls.  

SaaS monitoring: Your secret weapon to stop the chaos of shadow tools 

When every dollar counts, you can’t afford to pay for shadow IT detection tools that don’t deliver, that are loaded with features you’ll never use, and that require days of setup. 

This is where LastPass SaaS Monitoring can help.  

It’s effortless shadow IT and shadow AI discovery that works for you, not against you.  

Our new SaaS Monitoring tool is perfect for you if: 

• You need an easy, frictionless way to identify unauthorized tools within your organization. 

• You need a premium, enterprise-grade solution to discover shadow IT and shadow AI without the premium price tag. 

• You suspect there are overlapping or unused tools but don’t have the data to act on it. 

• You want to identify risks early and provide guidance to users – without appearing heavy-handed. 

If you’re ready to get a handle on shadow AI and shadow IT, demo LastPass now - and see the difference it makes.