Service Principal vs Managed Identity: Which One Should You Use in Azure?

Let’s face it — cloud security can be confusing. You’re deploying a function, running a pipeline, or spinning up Terraform — and then Azure asks,

“How do you want to authenticate?”

At that point, you’re usually choosing between two options:
Service Principal or Managed Identity.

Both get the job done. Both let your app or script talk securely to Azure resources. But they’re built for different situations — and if you pick the wrong one, you might end up managing secrets, chasing expirations, or worse… breaking production at 2 a.m.

In this post, I’ll walk you through:

What each one actually is (in simple terms)
How they differ
When to use which
A few real-world examples and best practices

What is a Service Principal?

Think of a Service Principal like a fake user account — but for your app.

It’s created in Azure Active Directory (AAD), and it gives non-human things (like Terraform, DevOps pipelines, or custom apps) a way to authenticate and access Azure resources.

To use it, you need:

A client ID
A client secret (or a certificate)
And your tenant ID

Sounds familiar? Yeah — it's basically OAuth for services.

Example: You’re using Terraform from your GitHub pipeline to deploy Azure infrastructure. That pipeline uses a Service Principal to log in.

az login --service-principal \
  -u <client-id> \
  -p <secret> \
  --tenant <tenant-id>

Heads up: These secrets expire — often in 1 year. Forget to rotate them, and your pipeline will fail silently or blow up loudly.

What is a Managed Identity?

This is where Managed Identity shines.

Imagine if Azure just said:

“Hey, I’ll manage the credentials for you — no secrets, no keys, no hassle.”

And that’s what it does.

Managed Identity gives your Azure resources (like a Function App or Virtual Machine) their own identity in Azure AD. You can then assign them roles, just like you would with a Service Principal — but without having to deal with secrets.

There are two flavors:

System-assigned: Tied to one specific resource.
User-assigned: A reusable identity you can share across multiple resources.

Example: You have a Function App that needs to read secrets from Azure Key Vault. Just enable managed identity, give it access, and you're done.

az keyvault set-policy \
  --name my-vault \
  --object-id <identity-id> \
  --secret-permissions get

No keys, no rotation, no drama.

Key Differences at a Glance

Feature	Service Principal	Managed Identity
Where it lives	Azure AD App Registration	Azure resource identity
Credentials	Client ID + Secret or Cert	None (uses Azure token service)
Secret Management	Manual rotation needed	Fully managed by Azure
Expiration Risk	High (unless rotated)	None
Best for	CI/CD from outside Azure	Apps running inside Azure

When Should You Use What?

Here’s the quick decision tree I use:

Use Service Principal when:

You're authenticating from outside Azure (e.g., your laptop, GitHub, Jenkins).
You need to access resources across tenants.
You’re writing IaC tools (like Terraform) that need long-lived identities.

Example: GitHub Actions pipeline deploying Azure resources → use SP.

Use Managed Identity when:

Your app or service is running inside Azure.
You don’t want to manage secrets (who does?).
You want the easiest, most secure way to talk to services like Key Vault, Storage, or SQL.

Example: An Azure Web App pulling connection strings from Key Vault → use Managed Identity.

>> Real-World Use Cases

Scenario	Use	Why
GitHub Actions deploying infra	Service Principal	GitHub is external to Azure
Azure Function reading Key Vault	Managed Identity	Runs inside Azure, no secrets
Terraform running on-prem	Service Principal	Needs external login
App Service + Azure SQL	Managed Identity	Secure, no secret rotation
Multiple AKS pods using same identity	User-assigned Managed Identity	Shared identity across pods

Best Practices (That'll Save You Headaches Later)

If you use Service Principals:

Rotate secrets regularly — ideally every 90 days.
Prefer certificates over plain secrets.
Store credentials in Azure Key Vault, not in source code.
Grant only the minimum permissions needed (least privilege FTW).

If you use Managed Identity:

Monitor role assignments — don’t let identities become all-powerful.
Use user-assigned identities when the same identity is needed in multiple places.
Make sure other resources (like Key Vaults) allow access via RBAC and firewall settings.

So, Conclusion

Both Service Principals and Managed Identities help your apps talk securely to Azure — but they solve different problems.

Here’s how I like to remember it:

If your code lives inside Azure, go with Managed Identity — it’s secure, simple, and secret-free.
If it lives outside Azure, or needs cross-tenant access, use a Service Principal — but treat those credentials like gold.

Get this right, and your automation will be smooth, secure, and low-maintenance. Get it wrong... and you might find yourself debugging expired secrets at midnight.

💬 Got questions or a weird edge case you're dealing with?
Feel free to drop it in the comments or reach out on LinkedIn. I’m always happy to talk DevOps, Terraform, or cloud strategy.