Service Principal vs. Managed Identity in Azure

“We want to use managed identities everywhere we can, but I’m still not sure where that leaves service principals.” - IAM principal, F500 customer. 

Oftentimes, we hear the same questions raised: when should I leverage managed identities? and when to use Service Principals? They’re not interchangeable, and when they’re used that way, organizations end up managing unnecessary secrets, permissions, and risks.

This post goes back to basics: clear definitions, practical guidance, and when to choose each. By the end, you’ll have a simple decision flow and guardrails to keep identities clean, auditable, and fast to operate.

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TL;DR

• Service Principal: An app identity in Entra ID that typically uses a secret or certificate. Flexible, but you own secret hygiene.
• Managed Identity: An Azure-managed identity for Azure resources. No secrets to manage. Best for cloud-native services that support it.
• Rule of thumb: Use Managed Identity by default. Fall back to a Service Principal only when the workload or the application doesn’t support Managed Identity, and store any secret in a vault.

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Definitions

Service Principal 

A Service Principal is an application identity within Entra ID (formerly Azure AD) that allows applications, services, and automation to access Azure resources securely. 

• Created when an app is registered in Entra ID. 
• Authenticates using client secrets or certificates. ‍
• Lifespan and credentials must be managed manually. 
• Useful for apps running outside Azure, such as CI/CD pipelines or external tools. 
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Managed Identity 

A Managed Identity is an identity automatically managed by Azure and can be tied to an Azure resource (like a VM, App Service, or Function App). 

• Two different types: System-assigned and User-assigned. ‍
• Azure fully handles credential management.‍
• Can only be used within Azure.
• Easily integrates with other Azure services like Key Vault and Storage accounts. 

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Use Cases: When to Use Each 

Use a Service Principal when: 

• Access is required from outside Azure (e.g., DevOps pipelines, on-prem systems). 
• You're working with third-party tools or multi-cloud platforms. 
• Secrets can be securely managed, e.g., using Azure Key Vault or any other vault.

Examples 

• CI/CD pipeline in GitHub deploying to Azure. 
• Terraform scripts running from an on-premise server. 
• Multi-tenant SaaS applications needing access to Azure APIs. 
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Use Managed Identity When:

• The service is running inside Azure (VMs, App Services, Functions). 
• You want secretless, secure authentication. 
• You need to reduce operational overhead around credential lifecycle. 

Examples

• App Service accessing Azure Key Vault.
• Azure Function writing to Azure Storage account.
• VM querying Azure Resource Graph via Azure SDK.

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Security Considerations 

Service Principals 

• Risk of Secret Leakage: Secrets may be exposed if not stored securely. 
• Lifecycle Audit & Governance: Requires rotation policies, alerting on expiration, etc. 
• Privileged Access Risk: Tendency to over-provision access. 
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Managed Identities 

• No Credential Exposure: Azure manages credentials entirely. 
• Scoped Usage: Tied to resource (or several resources).
• Reduced Attack Surface: Cannot be used outside Azure, reducing misuse potential. 
• Low Maintenance: No need to set up rotation or secret storage mechanisms. 

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Best Practices 

• Use Managed Identities by default for all Azure-native workloads. 
• Limit Service Principal usage to necessary external scenarios and protect secrets with vaults. 
• Regularly audit identity usage and access levels via Entra ID sign-in logs and Azure Activity Logs. 
• Apply least privilege when assigning roles.
• Automate expiration alerts and rotation of Service Principal credentials. 

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How Oasis Can Help

Visibility

Our platform provides comprehensive detection across your organization, giving you full visibility into your cloud, on-prem and hybrid environments. 

Oasis helps you understand how many managed identities vs service principals exist, what each is used for and who is the owner of this identity. Those identities are tied to consumers, and associated resources, whether internal cloud resources or external applications. 

We also correlate these identities with posture issues and active threats, enabling teams to prioritize risk based on real exposure and business impact.

Beyond visibility, Oasis delivers robust identity governance capabilities. We make it possible to safely migrate to managed identities wherever feasible, ensuring a smooth transition without breaking dependencies or disrupting operations.
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Provisioning

Use the Oasis platform to directly or indirectly provision your NHIs capturing the essential data (ownership, business justification, permissioning) when most available, at the time of inception.  Leverage your existing processes for identity provisioning and integrate with Oasis.
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Identity Lifecycle Management for NHIs

As organizations have robust processes around human identities, these practices should be applied to NHIs as well, including ownership, rotation for NHIs if required, attestation for all NHIs and decommissioning to avoid stale/orphaned NHIs.

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Final Thoughts 

For IAM professionals, the choice between Service Principal and Managed Identity is not just about convenience. It's about minimizing risk, reducing attack surfaces, and enabling zero trust principles. 

Use Managed Identity wherever the platform supports it. Use Service Principals only when needed, and secure them as rigorously as any sensitive credential. 

Want to see how this works across your tenant in minutes?

• Map every non human identity and its permissions
• Spot stale identities, exposed secrets, and risky identities.
• Standardize provisioning with templates for managed and federated identities
• Enforce lifecycle controls with ownership, attestation, and clean decommissioning

Get a live demo of Oasis, we will run through your use cases, surface quick wins, and leave you with an action plan.