Yes, the diameter of the starting blanks will be very slightly larger than that created by the tips of the gear teeth. I'm hoping to pull this off by having my mill X & Y locations fixed and only moving the Z axis and rotary table.Are you starting with blanks that are at or near the finished outside diameter of the sprockets? If so, you won't be plunging the full diameter of the end mill. In fact, it's not bad practice to "nibble" rather than full depth side mill, leaving a small cut to side mill for a nice finish, particularly on not so rigid setups. It's often quicker too.
After the gear teeth are machined, I'll adjust the X axis and make a final outside pass that created a uniform height of the teeth.