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Merge existing on prem Active Directory to existing office 365 environment

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We currently have an On premises Active Directory with close to 500 users as well as a separate office 365 account that contains as many users as well as distribution lists, public folders, and shared mailboxes. When creating a new user, we have to create an ad account and then create the user in office 365. Both systems have 2 different passwords for the user as they are running completely separate from each other.

The question is simply how can I merge these two systems so that

1. when I create an account in active directory, it creates the office 365 account.

2. Links the current AD user to it's respective office 365 account.

3. The account uses the AD password for both computer logins and email

4. When the users accounts are synced, I do not loose the distribution lists and security groups within office 365.

and finally as our company is in the medical field can I set up a test environment using our existing ad and office 365 information to simulate the merging and ensure it works before actually committing to this merging. 

thanks


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