The cloud identity scenario is the default option for all Office 365 environments. Every user created in Office 365 is provisioned in Azure AD. It is also possible to create users directly on the Azure portal and through Azure PowerShell.

The information that you fill on an Azure portal is used in your Office 365 environment, but, for example, passwords are only stored in Azure AD. This happens not only for security reasons, but also because Azure AD is the authentication authority for Office 365.

Only Azure PowerShell supports all the available features; that is why, it is used in most organizations, with scripts to automate some processes and to perform bulk operations such as assigning permissions, adding licenses, or changing properties.