From Lord of Souls; It is said that Umbra was made when Vile was tricked by a witch called Naenra Waerrr (possible Sheogorath in disguise) into putting a part of himself into the sword, so that it could send souls to him. While it was on the mortal plane, he'd have to embue it with some power. Eventually, the sword (either due to the nature of daedric energies or the human souls which passed through it or by design) gains sentience.
“The daedra prince Clavicus Vile wished a weapon made,” she said. “It was to be an instrument of mischief in Nirn, a source of amusement for him, a weapon that would send him souls. At first, however, he couldn’t find a smith who could do the work. He spent months—some sources say years—in frustration, until the witch Naenra Waerr came forth. She made the weapon, but it was unstable, and she told the prince that he would have to imbue it with some of his own power to make it whole and communicate with it on the mortal plane. Vile gave her the power she asked for. But it appears she tricked him, and some even speculate the witch was actually none other than Sheogorath, the Madgod, in disguise.”
“Tricked him how?”
“I said appears,” Nirai said. “It’s unclear whether what happened was part of a plan or merely the result of tampering with daedric forces. The sword is a soul stealer, and over time it comes to possess its owner. But whether by design, or by contact with human souls, or simply because it is in the nature of daedric energies, in time the part of Vile that was in the sword became a thing of its own, a sentient being.”